A benign US PPI got the market’s attention and helped drive lower US rates, a lower USD and higher US equities. Against broad-based weakness in the USD, the NZD has outperformed

A benign US PPI print got the market’s attention and helped drive lower US rates, a lower USD and higher US equities. Against broad-based weakness in the USD, the NZD has outperformed, steadily rising to 0.6075 and higher on the crosses. At yesterday’s close, the market was pricing 17bps worth of cuts for today’s RBNZ MPS.  Significant rate cuts are likely to be projected by the RBNZ, as in May, the only lingering doubt being whether the Bank is willing to pull the trigger today.

The market’s attention this week in terms of US economic releases was focused on the two inflation prints, the PPI and CPI.  The release overnight of a benign PPI print ticked the right box to pave the way for the Fed to begin the easing cycle next month.  Focus tonight will be on the CPI release to add to the case for a rate cut.

The PPI ex food and energy was flat in July, dragging the annual increase down to 2.4% y/y, two-tenths lower than the consensus. The items that feed into the Fed’s preferred inflation measure, the personal consumption deflator, such as physician care costs, hospital outpatient care and airfares were flat to lower. Services prices posted their first monthly decline since March 2023, driven by a pullback in trade services which measures margins received by wholesalers and retailers.

The soft data triggered lower US rates, a lower USD and higher US equities.  The market saw a slightly increased chance of a 50bps rather than a 25bps rate cut, with pricing for the September meeting nudging up to 40bps.  US Treasuries are down 3-7bps across the curve, led by the short end.  The 10-year rate is down 4bps to 3.86%.

US equities bounced back strongly, with the S&P500 currently up 1½% and the Nasdaq index up over 2%. Stocks are up for four consecutive sessions, with the S&P500 now just over 4% below the all-time high of less than a month ago, the panic-stricken conditions of just over a week ago now a distant memory.

In other economic news, NFIB’s small business optimism gauge rose to a 2½ year high of 93.7, although driven by one component measuring general business conditions, while most other components were flat to little changed.

UK labour market data showed an unexpected 0.2 fall in the unemployment rate to 4.2% in the June quarter, driven by strong employment. The usual health warning around the labour force survey applied.  The wages data showed further signs of slowing, with average weekly earnings ex bonuses rising in line with the consensus at 5.4%, still too high for comfort, but well down from the 7-8% pace of a year ago. There was little sustained market reaction to the data, with November still seen to be the timing of the next BoE rate cut rather than September.

In currency markets, the USD shows broad-based weakness, driven by the PPI report. The NZD has outperformed again, helped by the higher risk appetite backdrop but also possibly reflecting a further paring of short positions ahead of the RBNZ’s MPS today. It has been a steady upward climb for the NZD over the past 24 hours and it trades at a four-week high of 0.6075. The AUD is up through 0.6630 and NZD/AUD is higher at 0.9160, with yesterday’s Australian wage data broadly in line with RBA and consensus estimates, providing no smoking gun for either an imminent rate cut or hike.

The NZD continues to recover on the other crosses, with NZD/JPY back up through 89, NZD/GBP near 0.4725 and NZD/EUR at 0.5525.

Oil prices broke a streak of five consecutive daily gains, driven by increased tension in the Middle East, with Brent crude down 2% to be back below USD81 per barrel. The IEA’s monthly report suggested global inventory declines should abate in Q4, adding to the chance of a glut if OPEC+ proceeds with its plan to boost supplies.

The domestic rates market showed small movements with some mild curve flattening ahead of the RBNZ’s MPS today. The 2-year swap rate closed 2bps higher at 4.03% while the 10-year rate fell 2bps to 3.99%, with similar moves for NZGBs.

For the MPS this afternoon, most believe that a significant monetary policy easing cycle is imminent – in the order of 200-250bps – but the uncertainty simply lies in timing.  With the OIS market pricing in 17bps of rate cuts for the meeting, there will be a reaction in short-term yields whether the Bank cuts or not, but expectations for an aggressive rate cut cycle are unlikely to change – even the Bank’s hawkish May projection showed 250bps of easing, albeit not beginning until the second half of next year. With GDP contracting for six of the past eight quarters and inflation back into the target range, if we include estimates through to the current quarter, there is no time like the present to begin the well-overdue easing cycle.

The US CPI release will be the global focus, with a market reaction likely if there is any deviation from the expected 0.2% m/m core rate, although the benign PPI print means that the market is more readied for a soft CPI print. For the UK CPI release, focus will be on services sector inflation, still expected to be running around 5.5% y/y. Euro area Q2 GDP is also released, with preliminary figures pointing to a 0.3% q/q increase.