China’s equity market continued to surge in the aftermath of last week’s policy stimulus announcement. The China trade has helped drive the NZD and AUD up to fresh highs for the year

China’s equity market continued to surge in the aftermath of last week’s policy stimulus announcement.  The China trade has helped drive the NZD and AUD up to fresh highs for the year. Following last week’s soft euro area PMI data and sub 2% readings for regional inflation measures, ECB President gave a nod to another 25bps rate cut for the October meeting. A stronger ANZ business survey drove a turnaround in domestic rates yesterday and all eyes will be on the QSBO today.

As the new week begins, the China trade has continued to dominate market pricing. China’s sharemarket is the gift that keeps on giving, with last week’s 15.7% gain in the CSI300 index followed up with another 8.5% gain yesterday, supported by the government’s pivot in policy to make a more concerted effort to drive an economic recovery while short-sellers and fund managers scramble to close underweight positions. There was also anecdotal evidence of locals buying up, with new trading accounts being opened, and trading turnover increased to a record high. While some analysts are sceptical that the policy measures, some of which are yet to be fleshed out on the fiscal side, will drive stronger growth, others are calling it a Draghi-like “do whatever it takes” pivot by President Xi.

China official and Caixin PMI data remained weak, with manufacturing continuing to track below the 50 mark and the non-manufacturing figures slipping to, or towards, 50.  But the focus on historical data has been superseded by the outlook – easier monetary and fiscal policy, mainly the latter, should encourage improved growth momentum, but this is more a story for 2025.

Iron ore prices on the Singapore exchange opened stronger, following last week’s 11.2% gain to $102, with another strong gain to a high of $113.50, before fading to the current level around $107. Trading overnight on the London Metal Exchange for a range of metals has been mixed, with last week’s strong gains giving way to a mix of ups and downs.

In currency markets, the China trade has seen the NZD and AUD trade at fresh 2024 highs just under 0.6379 and 0.6942 respectively, with levels this morning not far off those marks. NZD/AUD is flat around 0.9190 after a brief look just over 0.92 in the aftermath of the ANZ business outlook survey yesterday (see below).  With the NZD outperforming (alongside the AUD), other NZD crosses are all higher from last week’s close. The yen is the weakest, down 0.7%, with the currency backtracking after Friday’s strong gain in the wake of Ishiba winning the LDP leadership race. USD/JPY is up through 143 and NZD/JPY is up 1.2% to 91.2.  Ishiba called an early national election for 27 October, taking advantage of his newfound support.

In economic news, German CPI inflation fell to a fresh 3½-year low of 1.8% y/y, as expected; Italy’s inflation fell to 0.8%.  This follows France and Spain CPI inflation rates of 1.5% and 1.7% respectively, released Friday. Euro area inflation, released tonight, is expected to fall to 1.8% y/y, with the core rate stickier at 2.7%. Speaking to Parliament, ECB President Lagarde said inflation might temporarily increase in Q4 this year as previous sharp falls in energy prices drop out of the annual rates “but the latest developments strengthen our confidence that inflation will return to target in a timely manner…we will take that into account in our next monetary policy meeting in October”.

This was an effective sanctioning of the market’s move last week to price in a high chance of a 25bps rate cut at the next meeting in October, following the softer PMI data and early reads on inflation. That meeting is now priced at 23bps, close to a done deal. A follow-up easing is expected in the December meeting.  Lagarde’s message drove lower European rates across the curve, reversing an earlier gain in yields, resulting in German yields showing a net small fall for the day.

US Treasury yields show small increases on the day with a slight steepening bias. In brief opening remarks to a moderated Q&A session, Fed Chair Powell repeated the message of the last FOMC meeting, saying policy will move over time toward a more neutral stance and we will “continue to make our decisions meeting by meeting”.

The Euro Stoxx 600 index fell 1% after automaker Stellantis NV cut its profit margin forecast and the 4% fall in the autos sector spilled over into other sectors. US equities are flat to slightly low for the session.

In domestic news the ANZ business outlook survey showed another robust lift in business confidence and activity indicators that portend a much better economic period, after the prolonged recessionary backdrop, supported by lower interest rates. Of note, pricing intentions rose for a third successive month and, alongside the better activity indicators, at face value didn’t signal a need for the RBNZ to accelerate the easing cycle.

The survey drove a turnaround in domestic rates with lower rates earlier in the session, driven by global forces, giving way to higher rates through the afternoon. NZGB and swap rates closed the day slightly higher, the former up 1-2bps across the curve and the latter up 1bp. From a low of 3.52%, the 2-year swap rate closed up at 3.57%. Net changes in the OIS market were small, with the October meeting priced at over 40bps and pricing through the three meetings to February at over 135bps, still suggesting a high chance of the RBNZ easing in 50bps clips.

In the day ahead, the domestic focus will be on the Quarterly Survey of Business Opinion, the last key data print ahead of the RBNZ’s Monetary Policy Review next week. The outcome could determine whether the RBNZ decides to go for a Fed-style 50bps cut or stick to 25bps. On the global calendar, Japan’s Tankan business survey, Australian retail sales, euro area CPI, US JOLTS and the ISM manufacturing surveys will all be of some interest and potentially market moving.