Global asset markets had a muted response to key US inflation data, after a brief spell of volatility, around the release. Equities closed higher in Europe, with the Euro Stoxx advancing 0.7%, but US markets are little changed in afternoon trade. Global currency and bond markets were similarly subdued.
US headline and core CPI increased 0.2% in July which was in line with consensus estimates. Core inflation increased 3.2% from a year ago, the slowest annual pace since early 2021. The super core measure (core services ex-housing) increased 0.2% after a 0.5% fall in June. The release of CPI and PPI data enables finetuning of PCE deflator forecasts, which suggest a benign 0.13% monthly increase in the core PCE deflator for July, when it is released at the end of the month.
Inflation is still broadly on a downward trend, and combined with the cooling labour market, will give US policy makers additional confidence to begin cutting rates at the September FOMC. The debate amongst investors is whether the Fed will cut by 25bps or 50bps. Current market pricing implies ~36bps of easing at the September meeting.
Despite some initial volatility around the CPI release, US treasuries are little changed. 2-year yields are up 3bps to 3.96% while the longer maturities outperformed flattening the yield curve. The 2y/10y curve, which briefly traded into positive territory in early August amid the extreme market volatility, has retraced to -13bps. 10-year treasury yields are 2bps lower at 3.83%.
After holding at the 2% Bank of England (BOE) target for two consecutive months, UK headline inflation rose to 2.2% in July, which was marginally below consensus estimates. The core reading increased 3.3%, also marginally below expectations. Services inflation, the BOE’s key measure of domestic price pressures, fell to 5.2%, which was a larger decline than expected and was down from 5.7% in the previous month.
Sterling and gilt yields fell following the CPI release as the market firmed expectations for BOE easing. EUR/GBP is ~0.5% higher. There is close to a cumulative 50bps of easing priced for the three remaining policy meetings this year.
The RBNZ cut the Official Cash Rate by 25bps to 5.25% at the Monetary Policy Statement yesterday. Although the consensus expected rates to remain steady, a significant minority including the BNZ, forecast a 25bps cut. The statement noted headline inflation is returning to the Bank’s target band and weak activity is contributing to spare capacity in the economy. The Bank’s modelled OCR track implies the RBNZ will cut rates by 25bps at both of the remaining policy meetings this year and the easing cycle will take the policy rate sub 4% by end-2025.
NZD/USD traded to the highest level in four weeks ahead of the RBNZ before falling close to 1% after the release. The NZD couldn’t recover in offshore trade, and has largely been trading sideways, amid generally quiet currency markets. The US dollar index dipped following the US CPI data but quickly recovered. The NZD was mixed on the major crosses outside of the USD making modest gains against the AUD, JPY and GBP, while losing ground against the euro.
NZ fixed income ended the local session yesterday lower in yield led by the front end of the curve. Although the initial market reaction to the RBNZ decision was fairly muted – there was around a 70% chance of a 25bps cut priced going into the meeting – the move lower in yields gained momentum after Governor Orr said a larger 50bps OCR cut had been considered as well. 2-year swap rates closed the session 13bps lower at 3.90% while 10-year swaps declined 7bps to 3.92%. 10-year government bonds largely matched the move in swaps closing 6bps lower at 4.17%.
The market looks ahead to the weekly bond tender today. New Zealand Debt Management is offering NZ$500 million of nominal NZGBs today split across Apr-27 ($225m), May-34 ($200m) and May-41 ($75m). The Apr-27 line was last tendered in March.
Australian 10-year bond futures are ~5bps lower in yield since the local bond market close yesterday, suggesting a downward bias for NZGB yields on the open.
In the day ahead, NZ selected price indicators for July will provide some initial guidance for Q3 CPI. Monthly card spending is also released. It is a busy international economic calendar. Australian labour market data is expected to show a gradual cooling with the unemployment rate unchanged at 4.1%. Monthly activity data is released in China and the PBOC’s MLF rate is expected to remain steady at 2.3%. Later this evening the main US data points are monthly retail sales and jobless claims.
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