Global markets were confined to narrow ranges with the US observing a public holiday. US equity, bonds, and most commodity markets were closed. European equities traded lower with the Euro Stoxx falling 0.6%. The Hang Seng had a strong session and advanced nearly 3%. The move was attributed to further market-friendly reforms such as allowing Chinese investors to buy Hong Kong stocks using the yuan. Currency markets were subdued, and European bond yields ended marginally higher in yield.
UK headline inflation increased at a 2.0% annual rate in May which was in line with consensus expectations. It is the first time in nearly three years that it has converged with the Bank of England’s (BOE) target. Core inflation was also in line with expectations at 3.5%. However, services inflation didn’t fall as much as expected, and at a 5.7% annual rate, may be of concern to policy makers.
The market pared expectations of BOE rate cuts following the data. Although the Bank is unanimously expected to leave rates on hold this evening, August is considered to be a ‘live’ meeting. There is about 9bps of easing priced for August, down from 13bps ahead of the CPI data. The pound gained against the euro immediately following the data before retracing to end little changed.
European bond markets traded modestly higher in yield. 10-year gilts increased 2bps to 4.06% while bunds closed 1bps higher at 2.4%. The 10-year OAT-Bund spread has stabilised at 79bp as financial stress from political instability in France has eased in recent days.
A Bloomberg article noted that Japan is considering issuing bonds with shorter maturities. This proposal is set against the backdrop of the Bank of Japan’s (BOJ) decision to reduce the amount of government bonds (JGBs) it purchases and the requirement to stimulate fresh demand from the banking sector. The BOJ holds ~US$3.7 trillion in JGBs which is around half of the total outstanding.
Aside from the brief move in the pound after the CPI data, currency markets were little changed. G10 currencies are less than 0.1% away from levels at 5pm yesterday. NZD/USD was confined to a 10-pip trading range.
NZ fixed income yields moved lower in the local session. The move in US treasuries set the initial tone which extended through the session. 2-year swap rates declined 5bps to 4.88% matching the yield lows from mid-May. Yields across the curve are approaching the bottom of the trading range from the past few months. 10-year government bond yields fell 5bps to 4.54%.
RBNZ Chief Economist Paul Conway’s speech yesterday on the inflation outlook didn’t impact the market. He noted ‘a period of restrictive policy is necessary to give (the Bank) confidence that inflation will return to target over a reasonable timeframe’
New Zealand Debt Management are tendering NZ$$500 million of nominal NZGBs today split across May-31 ($250m), May-34 ($200m) and May-54 ($50m). It is the first time that the May-2054 line has been tendered since the syndication in February. The 10y/30y curve has steepened back above 30bps in the recent bond rally.
Q1 GDP is released today. We forecast -0.1% q/q which would result in flat annual growth. The consensus estimate for Q1 is a modest 0.1% quarterly gain while the RBNZ forecast 0.2% q/q at the May Monetary Policy Statement. The broader picture from more timely activity data is an economy that is struggling to gain traction.
There are no updated quarterly forecasts prepared for the Bank of England meeting this meeting. The market will be focused on the accompanying statement and the vote split amongst the committee. At the May meeting, 2 of the 9 members preferred to reduce Bank Rate by 25bps, to 5%.
US jobless claims will also be monitored after the recent increase. The difficulty in seasonal adjustment for the series at this time of year clouds the interpretation. The median estimate is for a modest dip in claims. US housing market data and the Philly Fed outlook are also released.
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