China's growth stimulus has supported risk appetite and Asia-Pacific currencies. The NZD is up 1%. Equities have increased to fresh record highs. Stronger US economic data drove higher US Treasury yields. Oil prices fell

A pledge by China to provide further stimulus to promote growth has supported risk appetite and Asia-Pacific currencies.  The NZD is up 1%, driving back up through 0.63.  US and European equities have increased to fresh record highs. Stronger US economic data drove higher US Treasury yields, led by the short end, resulting in the curve flattening, a reversal of the pressure seen over the past week or so. Oil prices fell 3% after a report that Saudi Arabia is looking to raise production and accept lower oil prices.

The net balance of US economic data released overnight conveyed a stronger than expected economy. US initial jobless claims fell 4k last week to a four-month low of 218k, slightly lower than expected, although the usual warning of seasonal adjustment issues around this time of year applies and Pantheon Macroeconomics notes a similar fall last year.

Durable goods orders were stronger than expected across the board, with a flat headline figure against a 2.6% fall expected, with a much smaller fall in aircraft orders.  Excluding transportation, orders rose four-tenths stronger than expected at 0.5% m/m.

GDP figures were revised higher, with growth through 2023 now 2.9%, up from 2.5%, albeit concentrated in the first half of the year, with a more protracted slowdown in the second half.  For the most recent quarter, Q2 growth was revised up a tenth to an annualised 3.0%, although paired with a one-tenth downgrade for private consumption to 2.8%.

The only downside miss in the array of data releases was pending home sales slightly weaker than expected, rising 0.6% m/m.

The data drove a lift in US Treasury yields, with the 2-year rate currently up 6bps for the day to 3.62% after falling to a low of 3.52% just ahead of the data. The 10-year rate is up 1bp to 3.79% after trading as low as 3.75%. So, the 2s10s curve has flattened to 17bps, breaking a six-day run of steepening. Pricing for the Fed’s next meeting was pared a couple of basis points to 38bps, so now showing a relatively even chance of 25bps or 50bps.

Despite higher rates, equity markets are stronger, with the S&P500 currently up 0.4%, while the Euro Stoxx 600 closed up 1.2%, both at fresh record highs. To that performance we might owe to the stronger US data and improved outlook for China’s economy.

Yesterday, China’s Politburo followed up the significant stimulus package announced earlier this week with a pledge for further action in coming weeks. In addition to further easing of monetary policy, the communique notes the need to “intensify countercyclical adjustments” through fiscal (and monetary) policies as well as “maintain necessary fiscal expenditures”, although specifics on this were lacking. There was also a pledge to make the real estate market “stop declining” and promote a recovery, while strictly controlling new residential construction. Reuters reported that the MoF plans to issue RMB 2 trillion (1.4% of GDP) worth of special government bonds to support easier fiscal policy, with half of that used primarily to boost consumption and half to help local governments tackle their debt problems.

We note a couple of analyst reports that compare China’s policy announcements this week to ex ECB President Draghi’s “do whatever it takes” comment during the 2012 European debt crisis. The chance that China has approached a major pivot point should not be underestimated.

Increased optimism that China is finally addressing its economic woes with some vigour drove a stronger yuan, with USD/CNH on a steady downward decline since the announcement to below 6.98. China’s CSI300 index rose 4.2%, taking its gain so far this week to just under 11%.

The stronger yuan and higher risk appetite has spilled over into the NZD and AUD, the two strongest major currencies overnight and for the past 24 hours.  Both currencies are up about 1% from this time yesterday.  The NZD is trading at 0.6330, recovering yesterday’s loss but still below the 2024 high of 0.6356 level reached on Wednesday. The AUD took another peek just over 0.69 and is currently close to that figure.

While NZD/AUD is little changed at 0.9170, the NZD is stronger on the other key crosses. NZD/CAD is trading near the 2004 high reached on Wednesday, currently at 0.8525, with lower oil prices a headwind for the CAD. Oil prices are down around 3% with Brent crude at USD71.50, after the FT reported Saudi Arabia is ready to abandon its unofficial price target of $100 a barrel for crude as it prepares to increase output, in a sign that the kingdom is resigned to a period of lower prices. The article added that the kingdom has decided it is not willing to continue ceding market share to other producers.

Against a backdrop of higher US Treasury yields, the yen is also on the soft side of the ledger and NZD/JPY has recovered further to 91.5. GBP/USD made a fresh high, but NZD/GBP is modestly stronger at 0.4715., EUR continues to meet some resistance around 1.12 and NZD/EUR has pushed up to 0.5660.

In the domestic rates market, NZGB yields were flat to 4bps higher across the curve, with a steepening bias. Despite higher yields into the tender, demand was tepid for the $475m of 2029 and 2035 bonds on offer, while bidding for the $25m of 2037 bonds was relatively stronger, reflecting the de minimis amount on offer.  Swaps outperformed, with the 2-year rate down 2bps to 3.57% and the 10-year rate up 2bps to 3.88%.

In the day ahead the calendar is full, with ANZ consumer confidence and Tokyo CPI figures during NZ trading hours. The key release tonight is the US core PCE deflator, where the consensus is for a 0.2% m/m increase, with a downside miss seen more likely than an upside miss.  Annual inflation is expected to tick up to 2.7% y/y.