Powell’s testimony largely repeated previous messages, didn’t move the needle in financial markets. There has been more action in Europe, with the Euro Stoxx 600 index down 0.9%, led by France, and French-German bond spreads widened

Markets remain in a holding pattern ahead of key US CPI data later this week and Fed Chair Powell’s testimony to lawmakers, where he largely repeated previous messages, didn’t move the needle. US equities, Treasuries and currency markets show only small net movements. There has been more action in Europe, with the Euro Stoxx 600 index down 0.9%, led by France, and French-German bond spreads widened. The domestic focus today will be on the RBNZ’s Monetary Policy Review where the market looks positioned for a more dovish message than provided in May.

Overnight, Fed Chair Powell’s testimony to Senate lawmakers closely followed the message of the last FOMC meeting, with added context on recent data.  On that note he said recent readings on inflation point to “modest further progress” and recent data send “a pretty clear signal that labour market conditions have cooled considerably”, adding that the labour market was “strong, but not overheated”. He noted “more good data would strengthen our confidence that inflation is moving sustainably toward 2%”, adding “elevated inflation is not the only risk we face…reducing policy restraint too late or too little could unduly weaken economic activity and employment.

Overall, Powell wasn’t prepared to give clear guidance on the timing of possible rate cuts and market reaction was muted, with a July rate cut still seen as highly unlikely, and a September cut seen at about a 75% chance.  Ahead of that meeting there are still three CPI prints, including one later this week, and two key employment reports. The economic calendar has been light, but the NFIB survey of small businesses showed a third consecutive lift in business optimism to 91.5, off a low base.

Ahead of Thursday night’s CPI print, US Treasury yields remained in a tight range, with little net movement in the 2-year rate on the day and the 10-year rate up 2bps to 4.30%. Germany’s 10-year rate is up 4bps and the French-German 10-year spread widened 4bps to 66bps, more than offsetting the modest narrowing in the previous session in the post-election aftermath. Moody’s Investor Services said that France’s sovereign credit rating outlook may be lowered to negative from stable if it observes a larger deterioration in the affordability of debt-servicing costs compared to peers, a similar warning it provided three months ago.

France’s CAC-40 equity market index fell 1.6% as talks to form a government continued, and other key European markets were also notably weak, seeing the Euro Stoxx 600 index down 0.9%. By contrast, US equities recorded a fresh record high and the S&P500 is currently up slightly, led by Financials, ahead of the earnings season that kicks off later this week led by banking stocks.

Currency moves have been well-contained with only small net movements against the USD. Ahead of the RBNZ’s MPR today, the NZD has traded a tight range, with the fall overnight limited to just over 0.6110 and strength limited to just over 0.6130. NZD/AUD has traded overnight between 0.9075-0.9095. Of the majors, the yen has been on the soft side of the ledger, with USD/JPY at 161.30 and NZD/JPY hovering near a multi-decade high just under 99.

Yesterday, domestic rates were lower across the curve, with NZGB yields down 2-4bps across the curve, with a flattening bias, and swap rates down 3-5bps, reflecting global forces and some last-minute positioning ahead of the RBNZ’s MPR today.  With the 2-year swap rate at 4.81%, its lowest level in three months and well below BKBM of 5.60%, it’s fair to say that the market isn’t positioned for a hawkish update.  And, while no rate change is expected today, some 8bps of easing is pricing into the August meeting.  Fair to say that some in the market will be expecting to hear more dovish commentary from the Bank.

There will be keen interest in how much the Bank acknowledges the poor state of the economy – as per the last reading of PMI and PSI indicators and the QSBO – and whether this leads the Bank to back away from its threat in May to raise interest rates further.  We still find it remarkable that the MPC actually discussed the possibility of increasing the OCR back in May! But the Statement and minutes are unlikely to read as dovish as the market wants them to read, with the overall message likely to remain one of monetary constraint being required to drive inflation back down to target.

Also of interest will be China inflation data, while Fed Chair Powell faces another session in front of lawmakers tonight.