US & UK holidays tone down markets. Some dovish comments from key ECB members pushed down European yields; US equity futures are slightly higher, and US 10-year Treasury futures are little changed

It has been a quiet start to the week with US and UK markets closed for holidays. Of note, some dovish comments from key ECB members pushed down European yields but with limited impact on the euro. US equity futures are slightly higher, and US 10-year Treasury futures are little changed. The NZD pushed up to fresh two-month highs just over 0.6150.

With the US and UK on holiday, the news headlines are Europe-centric and the market has honed in on dovish comments by key ECB Governing Council members.

France’s central bank Governor Villeroy de Galhau said that he favoured “maximum optionality” after next week’s “done deal” cut to rates and hence he wasn’t willing to exclude a follow up cut in July, saying “let us keep our freedom on the timing and pace”. This was a dovish comment, as other key ECB GC members have been hosing down expectations for a follow-up cut in July. He said the ECB has “significant room” to loosen toward a neutral setting between 2-2.5%.

Earlier, ECB Chief Economist Lane gave a strong signal for a rate cut next week and added that policy will “still need to be restrictive all year long…but within the zone of restrictiveness we can move down somewhat.” In terms of cutting rates ahead of the US, he noted the ECB would take any “significant” exchange rate move into account, but pointed out there has been very little movement in this direction. In fact, he noted that the delay to Fed rate cuts had pushed up bond yields, spilling over into European rates, and implied that this could mean the need for lower than otherwise ECB short rates.

The dovish ECB comments saw the market price in a little more chance of rate cuts this year, with 61bps of cuts priced, versus 58bps as at the end of last week. European yields were lower across the curve, with Germany’s 2-year rate down 5bps and 10-year rate down 4bps.

There was no sustained impact on the euro, the bigger picture being one of broad USD weakness and EUR is up slightly to 1.0860.  In economic data, Germany’s business outlook, as measured by the IFO expectations indicator, rose by less than a point in May to 90.4, a fourth successive monthly increase, consistent with a modest improvement in the economic outlook.

At a conference, both BoJ Governor Ueda and Deputy Governor Uchida’s speeches pointed in the direction of tighter policy ahead, although continuing to run of line of proceeding cautiously. Ueda cautioned that after such a long period without major changes in rates in Japan, it was difficult to assess the impact on the economy and what a neutral interest rate might be. There was little impact on the market from these comments, although JGB yields continue to push up to fresh multi-year highs while the yen is only slightly stronger against the weak USD backdrop.

The NZD and AUD have outperformed, both up close to ½% from last week’s close. It has been a steady grind higher from the Asian open, with a fresh two-month high of 0.6153, one pip higher than the post-RBNZ level seen last week. The AUD is around 0.6660 and NZD/AUD is flat around 0.9240. NZD/JPY made a fresh 17-year high just over 96.5.  NZD/EUR traded at a fresh two-month high of 0.5670.

The domestic rates market was quiet although there was some cross-market underperformance on further underwinding of positions following last week’s hawkish RBNZ update. The 2-year swap rate rose 2bps to 5.13% while the 10-year rate was flat at 4.62%. NZGB yields were flat to slightly higher across the curve. Focus turns to Thursday’s Budget, where larger projected deficits suggest a significant increase in the borrowing programme.

The economic calendar remains light over the next 24 hours, with Australian retail sales and US consumer confidence data released.