A series of weaker than expected economic prints, headlined by services ISM which slumped to a 4-year low, strengthened the case for Fed rate cuts this year. US treasury yields fell and the S&P closed at a fresh record high

The S&P powered to a fresh record high close, in a shortened trading session, ahead of the July 4 US holiday. A series of weaker than expected economic prints, headlined by services ISM, strengthened the case for Fed rate cuts this year. European equities also had a strong session with the Euro Stoxx gaining more than 1%. Global bond yields fell led by a rally in treasuries and the US dollar made broad based losses against G10 currencies.

Activity in the US services sector slumped to a 4-year low. The services ISM fell 5 points to 48.8, which was far weaker than all the estimates on the Bloomberg poll of economists. The new orders and employment subindices declined sharply into contractionary territory and prices paid edged lower. Survey respondents reported that in general, business was flat to lower, seemingly corroborating the sharp fall. However, services ISM has been volatile recently and contrasts with an alternative gauge, the S&P services PMI, which edged up to 55.3.

Weekly jobless claims increased to 238k signalling further easing in labour market momentum while continuing claims reached the highest level since late 2021. ADP reported private sector employers added 150k jobs which was modestly below expectations. The ADP has not been a reliable indicator for non-farm payrolls which is released Friday evening. The Citi US economic surprise index has fallen to 2-year lows.

The minutes for the June FOMC meeting outlined that policy makers require additional information, to provide greater confidence that inflation is moving towards the 2% target, before easing policy. The vast majority assess that economic activity is cooling and the current policy stance is restrictive. Fed officials also noted that some inflation progress was evident.

US treasury yields fell sharply after the ISM data with the market pricing 48bps of Fed rate cuts by December. 10-year yields are down 8bps to 4.35% with a modest curve flattening bias. The MOVE index of implied treasury market volatility reached the highest level since April.

The Caixin services PMI in China fell to 51.2 from 54.0 which is the weakest level since October. The Caixin PMIs have been higher than the official readings recently. However, in aggregate the combined PMIs are pointing towards soft economic activity. The Peoples Bank of China lifted its yuan fixing to a new upcycle high, above 7.13, which will likely attract additional interest for CNH funded carry positions.

The US dollar, which declined initially, extended losses in following the economic data. EUR/USD advanced back towards 1.08 which is the midpoint of the narrow 2024 trading range. The yen underperformed amongst the majors and is little changed against the dollar having reversed earlier gains. NZD/USD surged above 0.6100, amid the weak dollar backdrop, and reached a high just short of 0.6130 before retracing. The NZD was stable on the major cross rates, except for NZD/JPY, which made a fresh multi-year high above 98.70.

There was a further steepening bias for NZ fixed income in the local session yesterday. 2-year swap rates declined 3bps to 4.89% retesting the June lows. 10-year rates increased 2bps to 4.54% with the 2y/10y curve back towards the highs for the year at-35bps. 10-year government bonds closed 3bps higher at 4.70%.

Australian 10-year bond futures are ~5bps lower in yield overnight, suggesting a downward bias to NZGB yields on the open.

In the first tender for the new fiscal year, New Zealand Debt Management is offering NZ$$500 million of nominal NZGBs today split across Apr-31 ($225m), May-34 ($175m) and May-41 ($100m). In addition, NZ$25 million of the Sep-40 inflation indexed bond (IIB) will be tendered. IIBs haven’t been offered in a tender since April. Breakeven inflation has fallen sharply in the past month as nominal yields have declined.

It is a quiet economic calendar with no domestic releases and only second-tier international data. US markets are closed for Independence Day. The UK election takes place this evening. The result should be clear at some stage during the Asia time zone tomorrow. The opposition Labour party has a 20% lead in polling and should be fully discounted by markets.