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US Treasury yields reversed course after their rise this week, encouraged by weaker data releases overnight. The 10-year rate is down 7bps to 4.54% with a slightly flatter curve

Currencies / analysis
US Treasury yields reversed course after their rise this week, encouraged by weaker data releases overnight. The 10-year rate is down 7bps to 4.54% with a slightly flatter curve
NYSE trading floor

US Treasury yields reversed course after their rise this week, encouraged by weaker data releases overnight.  The 10-year rate is down 6bps to 4.55% with a slightly flatter curve. The USD also reversed course and is broadly weaker, seeing the NZD recover overnight to 0.6125 after a brief dip below 0.61 just after the NZ close yesterday. Market reaction to the NZ Budget was minimal.

US economic data releases were bond-friendly, consistent with slowing growth and weaker inflation. In its second estimate, US Q1 GDP was revised down from 1.6% to 1.3%, as expected, with private consumption revised down to 2.0% from 2.5%. The core PCE deflator was revised down a tenth to 3.6%. The first estimate of gross domestic income for the quarter showed an annualised increase of just 1.5%.

Separately, the advanced trade good deficit for April showed an unexpected significant increase in the deficit to $99.4b, which starts Q2 off on a bad note and likely means another contraction in net exports. Pending home sales unexpectedly slumped by 7.7% m/m in April to a four-year low due to the “impact of escalating interest rates through April”, according to the chief economist who compiled the report. Initial jobless claims rose 3k last week to 219k and were slightly above market estimates.

NY Fed President Williams’ speech was broadly in line with previous comments.  He said he expects “inflation to resume moderating in the second half” and “the behaviour of the economy over the past year provides ample evidence that monetary policy is restrictive in a way that helps us achieve our goals”. In the Q&A he said that we don’t know if the neutral policy rate is higher, there is no sign yet of the neutral rate having risen. On near term policy he didn’t feel any urgency to adjust monetary policy and when asked about the chance of a rate hike, he said that it wasn’t his baseline view.

US Treasury yields were heading lower ahead of the data releases, following the market selloff earlier this week, and continued to push lower after the economically softer releases. The 2-year rate is currently down 5bps for the day to 4.92% and the 10-year rate is down 6bps to 4.55%. US equities are modestly lower, with the tech sector leading a sell-off after Salesforce, the largest pure-play provider of cloud-based enterprise software, plunged over 20% after its earnings report.

The USD has followed the path of US rates and is broadly weaker, reversing its gain over the previous day.  The NZD fell to a low just below 0.6090 not long after the NZ close yesterday and has recovered to as high as 0.6130 overnight. With the USD in the driving seat, there has been only small movement on the crosses. The AUD has recovered to 0.6640 after a brief dip below 0.66 and NZD/AUD has weakened slightly to 0.9220.

The yen has been one of the strongest majors over the past 24 hours after falling to levels where Japan’s MoF previously intervened in the market, making traders nervous, and helped by lower global rates. USD/JPY has fallen to 156.80 after trading as high as 157.70 yesterday. NZD/JPY is around 96.

It wasn’t a market mover, but the Euro area unemployment rate fell to 6.4%, its lowest level since the formation of the currency bloc. That fact won’t get in the way of the ECB kick starting the easing cycle next week with a 25bps rate cut.  EUR is up on broader USD weakness to 1.0840 while NZD/EUR is down slightly to 0.5650.

Yesterday, Finance Minister Willis delivered a no-surprises Budget, capturing the significant deterioration in the fiscal accounts widely acknowledged, and with promised tax relief to households largely offset by cuts to spending. The underlying operating deficit rises from an estimated 2.7% of GDP in FY24 to 3.1% of GDP in FY25, with deficits gradually declining thereafter. Net core crown debt hovers around 43% of GDP over the next few years.

For the market, most interest lay in how the RBNZ would interpret the fiscal projections.  The Treasury’s official line was that based on the total fiscal impulse, in FY25 “fiscal policy’s impact on aggregate demand, and hence inflation, is similar to the previous year”. Our interpretation was less sanguine, and we suggest that there is nothing in the Budget to make the Bank interpret it as dovish, with a real risk that it encourages a push in a more hawkish direction.

The $12b increase in the government bond programme wasn’t as large as some feared, with a sharp increase in short-term borrowing (skewed to Euro-Commercial Paper) adding to the pool of cash at the government’s disposal, and the quantum for FY25 of $38b, while $2b higher than projected in the half-year update, is no higher than the current fiscal year. NZ rates fell slightly after the release, although in the context of the recent aggressive post RBNZ MPS sell-off.

The net movement on the day for NZGBs was minimal, with lower rates following the move higher earlier in the session. The bigger force on the market than the Budget was activity in short-end swaps, with a return of the 5.20% level for the 2-year rate attracting receiving interest and that rate ending down 6bps to 5.14%. The curve was notably steeper, with the 10-year rate down just 1bp to 4.72%.

In the day ahead the economic calendar is full again, with CPI inflation data in Japan (Tokyo specifically) and China PMIs released during NZ trading hours. Tonight, we’ll see euro area CPI, Canada GDP and US personal spending and PCE deflator data for April.  The consensus is evenly spit on the core PCE deflator rising by either 0.2% or 0.3% m/m and either of these outcomes shouldn’t perturb the market.

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