Global equity markets made solid gains with the S&P trading above 5,600. Markets were largely subdued lacking catalysts. Investors are looking ahead to key US CPI data this evening

Global equity markets made solid gains with the S&P gaining more than 0.5% to trade above 5,600 to yet another record high. European stocks rebounded from the previous session dip. Major regional indices closed higher, and the Euro Stoxx advanced more than 1%. There was no economic data of note overnight. US treasuries are marginally lower in yield and currency markets were subdued for the most part as investors look ahead to key US CPI data this evening.

There was little new information on the outlook for monetary policy to be gleaned from Fed Chair Powell’s appearance before the House Financial Services Committee. The testimony was the same as he delivered the previous day to the Senate Banking Committee. He said the central bank had made ‘considerable progress’ on inflation but needed to see more ‘good data’ before lowering interest rates.

US treasuries reversed an earlier dip in yield and are little changed. The US$39 billion ten-year note auction attracted reasonable demand and cleared a basis point through the pre-announcement level. There is further supply tomorrow morning (NZT) – US$22 billion of 30-year bonds – which will take place following the release of the CPI data. European bonds closed lower in yield. 10-year bunds dipped 5bps to 2.53%.

Currency markets were generally confined to narrow ranges overnight. The NZD stabilised after the RBNZ’s dovish pivot contributed to a sharp move lower in the local session yesterday. The euro and yen are little changed against the dollar. The pound outperformed within the G10 following comments from the Bank of England’s chief economist who warned of continued persistence in inflationary pressures. NZD/GBP traded down towards 0.4730, the lowest level in 10-weeks. The Norwegian Krone dropped close to 1% against the US dollar following soft inflation data.

China’s June inflation data revealed ongoing subdued price pressures resulting from weak domestic demand. CPI increased 0.2% in compared to a year ago, which was below expectations. PPI deflation moderated but prices still fell 0.8% on an annual basis, which is the 21st month of declines. The Peoples Bank of China set a higher USD/CNY fix yesterday suggesting limited resistance towards a weaker yuan.

The Bank of Japan (BoJ) has been holding meetings with JGB market participants to assess how quickly it can reduce its monthly bond purchases ahead of unveiling its plans at the end of the month. The BoJ plans to gradually normalise policy, after massive bond buying in the past decade, which has seen the Bank own more than 50% of the outstanding JGBs. The current monthly purchase pace is close to ¥6 trillion, and a larger cut, may help to ease the pressure on the yen. After a dip in June, 10-year JGBs are back towards multi-year highs near 1.10%.

The RBNZ the Official Cash Rate steady at 5.5% at the Monetary Policy Review yesterday. The statement, accompanying the expected ‘on hold’ decision, represented a significant moderation in the Bank’s hawkish stance from the May Policy Statement. Unlike May, a rate hike wasn’t discussed, and alongside weak activity it was noted that restrictive monetary policy has ‘significantly reduced consumer price inflation’. As a result of the shift in tone, we have reverted to forecasting the RBNZ will cut rates in November.

The RBNZ statement contributed to a large rally across NZ fixed income in the local session yesterday. There is now ~60bps of cuts priced by November. 2-year swap rates closed 19bps lower, and only marginally above the January lows at 4.62%, while 10-year swaps dropped 8bps to 4.34%. The 2y/10y swap curve steepened to -28bps and is also back at January levels. Government bonds underperformed – 10-year asset swaps widened to 24bps, the top end of the multi-month trading range.

The weekly government bond tender takes place today. New Zealand Debt Management is offering NZ$500 million of nominal NZGBs today split across Apr-29 ($225m), May-34 ($225m) and Apr-37 ($50m). The tender will be closely monitored after tepid demand from investors previously. The May-2041 maturity not fully allocated and bid cover for the May-2031 line was 1.08. The recent bond cheapening on asset swap may support demand.

Australian 10-year bond futures are little changed overnight, suggesting limited directional bias for NZGB yields on the open.

NZ selected price indicators, released this morning, will help finalise estimates for Q2 CPI, due out next Wednesday. BNZ’s current forecast for Q2 CPI is 0.6% q/q and 3.5% y/y.

US CPI is the key release later this evening. The median forecast looks for a 0.1% monthly increase in headline and 0.2% increase in core. A 0.2% core reading would help confirm the run of high readings through Q1 is not persisting and build confidence in the disinflation trajectory, a prerequisite for the Fed to begin an easing cycle. Initial jobless claims will also be of interest after the move higher in recent weeks although several idiosyncratic factors, including the July 4 holiday, could impact the number.