The key market move has been a further chunky fall in oil prices, down in the order of 3½-4%, taking Brent crude below USD69 per barrel. Lower oil prices have supported lower interest rates, with US Treasury yields probing fresh lows. US equities are modestly higher while in currency markets JPY has outperformed, against the backdrop of lower global rates. The NZD is up slightly around 0.6155 and higher on the key major crosses apart from a fall in NZD/JPY.
US equities are up modestly despite the drag from weaker financials and energy stocks. JP Morgan’s share price is down 5% after saying that analyst earnings estimates were too optimistic, with the consensus net interest income estimate seen as “not very reasonable”, given expectations of much lower interest rates. The weaker earnings guidance was a drag on banking stocks, offsetting the positive news of the Fed confirming that it will cut higher proposed capital requirements for the biggest banks in half.
Energy stocks are weaker as oil prices are down 3½-4%, seeing Brent crude fall below USD69 per barrel for the first time since December 2021. The move lower was seen to be a combination of fears that global demand will weaken on soft US and China economic outlooks, rising supply and increasing speculative selling pressure. The futures curve is relatively flat, compared with a more bullish backwardation structure of late, consistent with expectations that a sustained period of low oil prices is likely to prevail.
Lower oil prices are helpful for the inflation path ahead and have supported a move down in Treasury yields, with rates down 5-6bps across the curve. Despite lower yields heading into the 3-year bond auction, there was strong bidding interest and the yield stopped 1.7bps through the prevailing rate. The 2-year Treasury yield fell to an 18-month low of 3.59% and it is currently down 6bps for the day at 3.60%. The 10-year rate re-tested the 3.64% low in the wake of Friday’s payrolls report and is currently down 6bps at that figure.
Economic data released were not market moving. UK labour market data showed wages inflation falling to a two-year low, with annual inflation for the weekly earnings ex bonuses figure falling to 5.1%, as expected. The data supports further BoE rate cuts, but also the widely held view that the Bank will skip cutting rates at its meeting next week and defer the next easing until the November meeting.
The US NFIB small business optimism index fell 2.5pts to 91.2 in August, more than reversing the surprising blip higher in July. While the index was weaker than expected, recent volatility has been driven by the zig-zagging of Presidential polls, with the survey featuring a strong political bias.
Yesterday, China trade data showed stronger exports growth as a bright spot for the economy, against a backdrop of weak domestic demand, with exports in USD terms up 8.7% y/y in August against a 0.5% y/y gain in imports. The latter was weighed by base effects.
Currency movements have been modest. JPY has outperformed against a backdrop of lower global rates, with USD/JPY down 0.5% overnight to 142.40. Bloomberg reported that BoJ officials see little need to raise interest rates at its meeting next week (in line with consensus) as they’re still monitoring lingering volatility in financial markets and the impact of the July hike.
The NZD has range traded and currently sits at 0.6155, up slightly from yesterday morning and overnight. NZD/JPY is down to 87.6 but the NZD is up slightly on the other major crosses. NZD/AUD has pushed up to 0.9245. Lower oil prices have weighed on CAD, making it the worst of the majors, seeing NZD/CAD recovering the previous day’s loss and up to 0.8375.
The domestic rates market was uneventful, with global forces driving down rates further. NZGB yields fell 1-2bps across the curve. The 2-year swap rate fell 1bp to 3.77% while the 10-year swap rate fell 3bps to 3.89%. Since the NZ close, the Australian 10-year bond future is down 4bps in yield terms, suggesting more downside pressure on rates on the open.
In the day ahead focus will be on the first Harris/Trump debate that kicks off 1pm NZ time. UK monthly GDP data are released tonight but the key economic release will be the US CPI. The consensus expects the CPI ex food and energy index to rise 0.2% m/m and 3.2% y/y for August, the same as in July.
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