Asset markets were confined to narrow ranges with limited economic data and the Labor Day holiday in the US weighing on market activity. European bond yields traded modestly higher. The AUD outperformed

Asset markets were confined to narrow ranges with limited economic data and the Labor Day holiday in the US weighing on market activity. European equities made modest gains with the Euro Stoxx index advancing 0.3%. US S&P futures are little changed since the open yesterday and have maintained the gains from the sharp rally into month end at the end of last week. Asian stocks declined reacting to the lacklustre Chinese PMIs released in the weekend with the Hang Seng losing 1.7%. European bonds moved higher in yield while the US dollar was mixed against G10 currencies.

The Caixin manufacturing PMI, which focuses on smaller privately owned enterprises in China, recovered to 50.4 last month after slipping into contractionary territory in July. However, the collective message when viewed in conjunction with the official PMIs released on Saturday – the composite index was little changed at 50.1 – is one of lacklustre activity. Chinese policy makers have struggled to contain the downturn in the property market and achieving its 5% 2024 growth target is looking increasingly challenged.

European bond markets traded higher in yield as investors look ahead to upcoming sovereign supply. 10-year bunds increased 4bps to 2.33% with a modest curve steepening bias. There with a similar upward bias for UK gilt yields – 10-year bonds closed 4bps higher at 4.05%. The US treasury cash market is closed for the holiday, but bond futures imply a marginally higher 10-year yield, relative to the 3.90% close on Friday.

Corporate bond supply is likely to pick up as investors and issuers return after the long weekend in the US. Issuers will likely prefer to transact ahead of the August jobs report with the associated market volatility on Friday. Bloomberg estimates there will be US$125 billion of high-grade corporate issuance in September. Some of the rise in treasury yields at the end of last week was attributed to hedging of the upcoming corporate deals. US investment grade credit spreads are close to the tightest level in three years.

The US dollar index (DXY) was little changed overnight amid thin trading volumes, which were running at around 50% of recent averages, according to DTCC data. The stability in the DXY masked some underlying movement in G10 currencies. The Australian dollar outperformed in the offshore session and is close to 0.5% stronger against the dollar. On the other end of the spectrum the yen was relatively weak losing 0.6% against the dollar.

NZD/USD was confined to a narrow trading range overnight and is little changed. The NZD/AUD move lower that began in the local session extended, with the cross trading towards 0.9170, having opened the week close to 10-week highs at 0.9240.

NZ fixed income yields traded higher in the local session yesterday reflecting moves in offshore markets in the absence of domestic catalysts. 2-year swap rates increased 2bps to 3.96% and the curve steepened with 10-year rates increasing 5bps. The 2y/10y swaps curve is back at the recent high near 10bps. Government bonds yields moved higher, in a largely parallel curve adjustment, with 10-year bonds closing 4bps higher at 4.31%.

Australian 10-year government bond futures are ~2bps higher in yield since the local close yesterday, suggesting a modest upward bias for NZ yields on the open.

The manufacturing ISM is released later this evening. The index fell to 46.8 in July and the preliminary manufacturing PMI weakened towards the more negative signal from the ISM. The consensus estimate looks for a modest bounce to 47.5. The employment subindex will be closely monitored after slumping to 43.4 in July even though manufacturing contributes a small share of total US employment.