Technology stocks led declines in global equities amid concerns about tighter restrictions from the US government on advanced semiconductor exports to China. The Nasdaq is down almost 2.5% while the S&P has fallen 1.4% in early afternoon trade. Equities also closed lower across Europe. The US dollar fell against developed market currencies while global bond markets are little changed.
Influential Fed Governor Christopher Waller said the recent easing of price pressures, and signs that the labour market is cooling, had given him more confidence that inflation was coming under control. He outlined that while immediate rate cuts weren’t required, he believes ‘it is getting closer to the time when a cut in the policy rate is warranted’.
New York Fed President, John Williams echoed these comments playing down the prospect of a July rate cut but suggesting greater confidence in the disinflationary trend. Market pricing for the Fed was little changed with a 25bps cut priced for the September FOMC and close to 65bps of easing by December.
US Industrial production rose by 0.6% in June which was above consensus expectations for a 0.3% increase. A large jump in the volatile autos category offers a partial explanation, but even stripping out this impact, manufacturing was still up 0.3%. However, subdued manufacturing surveys point to weaker activity ahead.
US treasuries are little changed with an earlier drift higher in yield reversing as equity losses provided support for bonds. 10-year yields are back at the recent lows near 4.15%. The US$13 billion 20-year treasury auction attracted decent demand from investors.
UK CPI was slightly higher than expected. Headline inflation held steady at a 2.0% annual rate compared with expectations of a dip to 1.9%. Core inflation was also 0.1% above consensus at 3.5%. The market reduced the probability of a 25bps cut by the Bank of England at its August meeting to around 35%.
The US dollar is weaker against the majority of G10 currencies. The dollar index fell below support at 104 to reach the lowest level since March. The main catalyst appears to have been comments from Trump indicating concern about the strong dollar and particularly relative to the yen and yuan. The yen and Swiss franc have outperformed amid the softer risk tone.
The Australasian currencies are little changed in offshore trade despite the weaker dollar. The NZD/USD move higher stalled ahead of 0.6100 and has subsequently faded. The NZD is softer on the major cross rates. NZD/JPY is back at 95 having traded above 99 a week ago. NZD/AUD was stable and oscillated in a narrow range around 0.9020.
NZ Q2 headline annual CPI declined to 3.3% from 4% in Q1. This was marginally below the consensus estimate of 3.4% and compared favourably with the RBNZ’s 3.6% forecast at the May Monetary Policy Statement. However, the non-tradables component retraced less than expected and increased at a 5.4% annual rate. Measures of core inflation, including the RBNZ’s sectoral factor model, have continued to ease towards the mid-3s.
There was considerable market focus on the CPI figures following the change of tone from the RBNZ at the Monetary Policy Review last week. The market was looking for confirmation, or otherwise, of the easing priced for the RBNZ. In any case the data didn’t provide a conclusive outcome. Pricing for the August meeting dipped a couple of bps but is still indicates slightly less than a 50% chance of a 25bps rate cut.
NZ fixed income moved higher in yield in the local session yesterday as the market digested the CPI data. The small upside surprise, relative to consensus on non-tradables, contributed to the move but yields closed below the session highs. 2-year swap rates ended 3bps higher at 4.41% in a parallel curve shift. 10-year government yields closed 2bps higher at 4.39%, close to 4bps above the intra-day yield lows. Australian 10-year bond futures are little changed overnight, suggesting limited directional bias for NZGB yields on the open.
New Zealand Debt Management (NZDM) is offering NZ$500 million of nominal NZGBs today split across Apr-29 ($225m), May-34 ($225m) and Apr-37 ($50m) in the weekly tender. Cover ratios exceeded three times for each of the lines last week and NZDM have opted to offer the same lines and volumes.
There is no domestic data today. The regional focus will centre on June Australian labour market data. The consensus looks for a 0.1% uptick in the unemployment rate to 4.1% and a 20k increase in employment. UK labour market data will be watched to finetune expectations for the August Bank of England meeting.
The European Central Bank (ECB) is unanimously expected to leave rates on hold by economists which aligns with market pricing. US Initial jobless claims, which are likely distorted by the timing of auto plant shutdowns and the impact of Hurricane Beryl, and the Philly Fed manufacturing survey are released in the US.
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