Buoyant investor risk sentiment contributed to strong rallies across major equity indices. The S&P is up close to 1% in early afternoon trade, retesting the record high of 5342 reached back in May. The move was underpinned by gains in technology stocks. European stocks also had a strong session with the Stoxx up 1.6% ahead of the European Central Bank (ECB) meeting this evening. Price action was choppy in currency and bond markets amid mixed economic data. Global bond yields are lower.
The ADP measure of private US payrolls growth increased by 152k in May which was below consensus estimates for a gain of 175k. The relationship between the ADP data and nonfarm payrolls, which is released on Friday night (NZT), hasn’t been particularly strong in recent months.
The US services ISM rebounded sharply. The index rose to 53.8, from 49.4 in April, as business activity and new orders growth strengthened. This was ahead of consensus estimates. However, survey respondents noted that high interest rates and inflation remain of concern. The employment subindex remained in contractionary territory at 47.1 while prices paid dipped to 58.1 from 59.2.
The Bank of Canada (BoC) cut rates by 25bps to 4.75% having been on hold since July of last year. The move was widely anticipated by economists and was almost fully discounted by the market. The Bank said it is ‘reasonable to expect further cuts’ if inflation eases and that policy settings ‘no longer need to be as restrictive’. There is a close 50bps of easing priced by the end of the year. Canadian bonds rallied – 2-year yields fell 11bps to 3.94% - and the yield curve steepened following the decision.
The services sector in China unexpectedly expanded at the fastest pace in 10 months in May. The Caixin services PMI increased to 54.0 from 52.5 in April. The Caixin manufacturing PMI, released earlier in the week, was also stronger than expected. The pickup in Caixin indices, which are focused on small and medium size private enterprises, contrast with the relatively lacklustre official PMI readings.
US treasury yields moved lower in a parallel curve shift. Price action was choppy. A spike higher after the strong services ISM quickly reversed. 10-year treasuries are 3bps lower at 4.29% and have now dropped more than 30bps from the late May highs above 4.60%.
The US dollar was mixed but generally stronger against G10 currencies. In the majors, the yen fell 0.3% against the US dollar while the euro was little changed. The Canadian dollar dropped almost 0.5% following the BoC decision before paring its losses. The NZD was confined to a narrow range against the US dollar and is largely unchanged overnight. NZD/AUD continued to move higher, driven by the AUD leg, with the cross trading above 0.9300 to the highest level since the middle of March.
NZ fixed income yields moved lower the across the curve in the local session yesterday with a bull flattening bias. 2-year swap rates fell 2bps to 5.04% while 10-year rates fell 6bps to 4.55%. The market took its cue from offshore in the absence of domestic catalysts. Australian 10-year bond futures are ~1bps lower in yield overnight suggesting a limited directional bias for NZGB yields on the open.
New Zealand Debt Management (NZDM) launched the syndicated tap of the 15 May 2028 nominal bond yesterday which will price today. NZDM expects to issue a minimum of NZ$2.0 billion and the transaction will be capped at NZ$4.0 billion. Given the timing of the launch, the weekly bond tender scheduled for today has been cancelled, as is normal practice.
The ECB is expected to cut rates by 25bps at its meeting this evening. Rather than the rates decision, the focus will centre on the future path for monetary easing and how the Bank communicates its decision. We expect the ECB will be non-committal on future easing and follow a data-dependent approach. There is a cumulative 65bps of easing priced by the end of the year.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.