US equities advanced following strong retail sales data. The S&P is up 0.4% in afternoon trading. There has been a significant rotation towards small capitalisation stocks in recent sessions. The Russell 2000 index has increased 10%, easily beating the 1.5% gain in the S&P, as investors look ahead to rate cuts by the Fed, which benefit smaller companies with typically higher debt levels. Treasuries are lower in yield with the curve flattening. The US dollar is little changed, after gains following the data faded.
Gold hit a record high of US$2465 an ounce. It also benefits from lower interest rates, given the cost of holding the precious metal, as it bears no interest. Gold has rallied by close to 50% since late 2022, underpinned by demand from central banks, to diversify reserves and reduce their reliance on the US dollar.
US retail sales were flat in June and beat consensus estimates for a 0.2% decline. The control measure, used to calculate GDP, increased by 0.9% which was well above expectations for a 0.2% gain. The data contrasts with a slowdown in consumption growth in recent months driven by high interest rates and a cooling labour market.
US treasury yields moved lower initially before retracing following the strong retail sales data. 2-year yields, having traded as low as 4.41%, are unchanged near 4.45%. In a reversal of the recent trend, the curve flattened with 10-year yields down 6bps at 4.17% and close to the recent lows. 10-year bunds closed 5bps lower at 2.42%.
Canadian inflation fell more than expected in June, opening the way for a follow up rate cut by the Bank of Canada, at its policy meeting next week. There is a ~85% chance of a 25bps cut priced. Headline inflation increased 2.7% on an annual basis, down from 2.9% in May. Measures of core inflation sent mixed messages. Median inflation fell but the trimmed measure was steady at 2.9%.
Japanese 10-year swap spreads have turned negative, for the first time since early 2022, as investors prepare for a slowdown in bond purchases by the Bank of Japan. The central bank has been consulting with JGB market participants, to assess how quickly it can reduce monthly bond purchases, ahead of unveiling plans at its monetary policy meeting at the end of the month.
The US dollar moved higher immediately following the retail sales data but has retraced to be largely unchanged on the major crosses. The yen has been consolidating since likely intervention last week. Data implies that there was a follow-up, less impactful second round of intervention, on Friday night (NZT). The NZD and AUD are modestly weaker against the US dollar. NZD/USD traded below 0.6040 to the lowest level since mid-May.
NZ fixed interest markets continued to move lower in yield in the local session yesterday. 2-year swap rates dropped to 4.39%, a fall of 4bps on the day. The curve flattened a touch as 10-year swap rates fell 7bps to 4.16%. 10-year NZGBs yields moved 4bps lower to 4.41%, in a largely parallel curve move, which is retesting the yield lows from last December. Australian 10-year government bond futures are 4bps lower since the local close, suggesting a further downward bias for NZ yields on the open.
The domestic focus today will be the key Q2 CPI data. The consensus is for a 0.5% increase in the June quarter and 3.4% annual rate, and our forecasts are 0.1% higher for each. The market will be sensitive to the non-tradables component. The RBNZ forecast non-tradables to increase 5.3% y/y at the May Monetary Policy Statement. A softer print will help validate the aggressive easing cycle priced for the RBNZ.
UK CPI data is released early this evening. Headline inflation is expected to slip to 1.9%, from 2.0% in May. Core inflation is also expected to ease modestly to 3.4%. Market pricing is roughly 50/50 for a 25bps rate cut at the August Bank of England meeting. US housing data and industrial production data round out the calendar.
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