Global equities remained well supported into the weekly close. The S&P traded to another intra-day record high, but lost ground late in the session, to close 0.6% higher. Large banking stocks underperformed after reporting disappointing results. A macro factor to note is banks are putting aside additional reserves, to cover deteriorating loans, which points towards pressure on consumers. European stocks had a strong session – the Euro Stoxx gained 1.3%. Treasuries looked past unexpectedly strong PPI data and closed lower in yield while the US dollar fell against developed market currencies.
US producer prices increased by more than expected in June. Headline PPI increased 0.2% m/m, and core prices rose by 0.4%, above the 0.2% median forecast. The pickup in core PPI was driven by a jump in retail and wholesale margins and is unlikely to be sustained.
Economists have estimated the US core PCE deflator rose by just 0.15% in June now that most of the inputs are available after the release of CPI and PPI data. The core PCE deflator is tracking well below the Fed’s June FOMC forecast and should provide greater comfort about beginning to ease monetary policy. The market is pricing 63bps of Fed rate cut this year, up from 50bps a week ago.
The July Michigan consumer sentiment index fell to 66, below the consensus estimate of 68. The index is being impacted by a transition to web-based data collection, but levels remain consistent with moderate growth in consumers’ real spending. The key takeaway from the survey was the drop in the 5–10-year inflation expectations to 2.9% from 3.0%. Medium-term expectations remain elevated, relative to levels that prevailed in the 2010s, but the Fed will take comfort from the recent stability, despite the run of strong actual inflation prints in the March quarter.
US treasury yields, which declined ahead of the PPI data, temporarily jumped before resuming the move lower led by shorter maturities. 2-year yields dipped 6bps to 4.45%, the lowest level since March. 10-year yields closed at 4.18%, nudging below the 4.20% level, which has contained the downside through June. The recent curve steepening trend in 2y/10y extended to -27bps. In Europe, 10-year bunds closed 3bps higher at 2.49%.
The US dollar remained under pressure, particularly against the yen. The yen has been supported in the aftermath of suspected intervention, which was seemingly confirmed, by analysis of the Bank of Japan’s accounts. USD/JPY fell to 158, some 2.5% below the recent peak. The dollar index is retesting support near 104 which has formed the base on several occasions over the past three months. The pound was amongst the best performing G10 currencies which saw EUR/GBP fall to two year lows.
NZD/USD was firmer into the weekly close, trading back above 0.6100 in line with the weaker US dollar, and almost fully recovering the post-RBNZ fall. The CFTC reported some modest trimming of speculative long NZD positions, which remain sizable, near 6-year highs. NZD/GBP remained under pressure and has traded back towards 0.4700. NZD/JPY fell to 96.50.
NZ fixed interest markets ended lower in yield in the local session on Friday with a curve steepening bias. The run of weak data continued. The manufacturing PMI fell to 41.1 and card transactions remained soft. 2-year swap rates closed down 7bps at 4.49% and 10-year government bonds closed at 4.50%. Australian 10-year government bond futures are 6bps lower since the local close, suggesting a downward bias for NZ yields on the open.
NZ services PMI is released today. The index fell sharply in May to its weakest ever level after excluding the pandemic volatility. In China, the consensus is for Q2 GDP growth to slow to 1.0% q/q from 1.6% in Q1. In addition, monthly activity data for June is released covering retail sales, industrial production, and fixed asset investment. The Peoples Bank of China is expected to leave its MLF rate unchanged at 2.50%.
[chart;daily exchange rates]
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