US dollar generally firmer amid higher UST yields. China 10-year bond yields fell to a record low. Risk premia on European assets have reduced on lower chance of far-right victory in France

US treasury yields moved higher despite the manufacturing ISM coming in below expectations. The S&P lacked strong directional bias and continued to consolidate above 5,500, just below the record highs. Risk premia on European assets reduced on indications that the far-right victory in the French election was less decisive than some had expected.

The Euro Stoxx gained 0.7% and the spread between French and German 10-year bond yields tightened to 74bps compared with the recent peak of 86bps. However political uncertainty is expected to linger for at least another week, ahead of the second round of voting, which is likely to constrain performance.

The ISM manufacturing survey was generally weaker relative to expectations. The headline index dipped to 48.5, from 48.7 last month, which was below the median estimate for an increase to 49.1. New orders rebounded to 49.3 from 45.4 but remains below 50. The prices paid and employment indices fell compared to May.

US treasury yields moved steadily higher led by the longer end of the curve. Reaction to the soft ISM data was relatively muted with a dip in yields quickly reversed. 10-year yields increased 8bps to 4.48% and are now back in the middle of the 4.20%-4.70% trading range from the past 3 months. The 2y/10y curve continued to steepen towards -30bps, from -50bps at the end of June.

Yields were higher and curves steeper across major European markets with 10-year bunds and gilts yields both closing 11bps higher at 2.60% and 4.28% respectively. There was limited market reaction to German CPI which increased 2.5% in June, in line with consensus estimates, and down from 2.8% in May.

In Japan, the Tankan large manufacturing outlook beat expectations at +14 supporting the case for another Bank of Japan rate hike at its meeting later this month. The details revealed more corporates are planning to raise prices and expect consumer prices to remain above the central bank’s 2% target over the longer run. There is about 6bps of tightening priced by overnight index swaps.

The Caixin manufacturing PMI in China edged up to 51.8 in June from 51.7 last month. Although this was higher than the 51.5 consensus estimate, the message from the official PMIs, that were released in the weekend, suggest the economy is struggling to gain traction with weak demand weighing on production. The Caixin survey is more focused on private companies which may account for the divergence from the official measure.

The yield on China’s 10-year bonds fell to a record low below 2.20%, a 50bps rally from the start of the year. Bonds have performed strongly against the backdrop of weak economic activity, expectations of further monetary easing and ample financial system liquidity given weak loan growth. Bloomberg reported the People’s Bank of China (PBOC) said it would borrow government bonds from primary dealers as a potential precursor to sales to the market to restrain the recent rally. The PBOC warned in May about the risks of leveraged bond investments.

In currency markets, the US dollar is generally firmer aligned with higher yields. The euro has outperformed since the market open yesterday reflecting the improved tone towards European assets. The yen remained weak given its sensitivity to US treasury yields with USD/JPY trading to a fresh multi-year high near 161.70.

NZD/USD is weaker overnight and dipped below 0.6070, reflecting the broader US dollar move. The NZD is marginally softer against the AUD, and on major European cross rates.

NZ fixed interest markets closed marginally lower in yield with some residual month-end demand likely related to the public holiday on Friday. 10-year government bond yields fell 2bps to 4.62% marginally outperforming swaps. Inflation indexed bonds cheapened with New Zealand Debt Management announcing that the Sep-2040 line will be offered in the tender on Thursday.

Australian 10-year bond futures are ~8bps higher in yield overnight, suggesting an upwards bias to NZGB yields on the open.

NZIER’s Quarterly Survey of Business Opinion is released today and will provide indicators on activity and inflation. The survey is unlikely to materially alter the view that economic activity is very weak. Pricing indicators will be closely monitored to see if the recent downtrend has continued.

Headline European CPI is expected to slip to 2.5% from 2.6% last month. The main regional data prints – the last of which was Germany last night – have all been close to consensus expectations. US JOLTS data is released this evening and further commentary can be anticipated from global policy makers attending the ECB’s annual central banking forum in Sintra.