Global equity markets declined for the second consecutive session. Equities are beginning to price in more political risk. The US dollar gained against G10 currencies

Global equity markets dropped for the second consecutive session. There were limited catalysts with only second-tier economic data. The S&P is down 0.6% in early afternoon trading with the Euro Stoxx registering a similar decline. Equities are beginning to price in more political risk – the VIX has climbed to the highest level since April. Global bond markets yields were little changed, and the US dollar traded higher against G10 currencies, partially retracing the decline from the previous day.

US initial jobless claims rose to 243K, which was above expectations, and an increase from the previous week’s upwardly revised level of 223k new claims. The increase was driven by shutdowns at auto plants and disruption caused by Hurricane Beryl. However, the underlying trend in claims is rising aligned with the cooling labour market. Continuing jobless claims rose to 1.87m, the highest level since November 2021.

There was a solid bounce in the Philly Fed manufacturing index. However, the survey covers just one small region of the US and has a small sample size. More regional Fed manufacturing surveys are required before making a broader assessment of the national backdrop.

US Treasury yields edged higher across the curve in a quiet session. 10-year yields are up 2bps to 4.18%, only marginally above the four-month lows reached earlier in the week. There was tepid investor demand in the US$19 billion 10-year TIPS auction which tailed by 2bps.

There was little market impact from the European Central Bank’s (ECB) decision to leave rates unchanged which was widely expected by investors. ECB President Lagarde said the September meeting is ‘wide open’ and ‘will be determined on the basis of all the data that we will be receiving’. Market pricing indicates a high probability of the ECB cutting rates in September. There is about 21bps of easing indicated by overnight index swaps. Front end bunds closed 1-2bps lower in yield while 10-year bonds increased 1bps to 2.42%.

The UK unemployment rate held steady at 4.4%, which was in line with expectations, and average weekly earnings slowed to 5.7% from 5.9% in the three months to April. The pace of wage growth remains stronger than Bank of England (BOE) forecasts in May. Market pricing continues to indicate about a 50/50 chance of a 25bps cut at the BOE’s policy meeting on 1 August.

The dollar made broad based gains and advanced against all the G10 currencies. The yen underperformed, falling 0.5% against the dollar, although there was no obvious catalyst. NZD/USD moved lower aligned with the broader dollar backdrop. NZD/AUD remained lower after stronger than expected Australian employment growth contributed to a move towards 0.9010.

NZ fixed income moved 4bps lower in the local session yesterday. There was a parallel curve shift across the government and swap curves. 2-year swap rates closed at 4.36% matching the recent yield low. 10-year government bonds ended the session at 4.35%, marginally below the January levels, and at the lowest yield level since June last year. The weekly government bond tender attracted decent demand. There were NZ$1.5 billion of bids for the NZ$500 million of bonds offered. All lines were well covered for the second consecutive week.

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

There is no domestic data today. Japan consumer prices will be in focus ahead of the Bank of Japan meeting next week. Overnight index swaps are pricing ~5bps of tightening. The BoJ is widely expected to use 10bps increments to adjust its policy rate. Retail sales in the UK and Canada are released.