Following yesterday’s volatile session, after Iran’s missile attack on Israel, markets are calmer as they await the next move. The yen is much weaker after dovish comments by Japan’s new PM and the BoJ Governor

Following yesterday’s volatile session, after Iran’s missile attack on Israel, markets are calmer as they await the next move. US equities are currently flat and US Treasury yields have pushed higher, a combination of some mean revision and a stronger than expected ADP payrolls figure. The yen is much weaker after dovish comments by Japan’s new PM and the BoJ Governor. The NZD has also underperformed overnight, probing lows near 0.6260.

 There have been no new developments following the volley of missiles Iran sent into Israel apart from a volley of new threats, and we await the next move. Israel PM Netanyahu vowed to retaliate and met with senior leaders in the wake of the attack while Iran threatened “crushing attacks” if Israel strikes back. Iran has closed airports in the western half of the country in anticipation of a strike from Israel. Israel has continued its ground assault in southern Lebanon.

Markets are therefore calmer after the previous rocky session. After opening on a soft note, the US S&P500 index is currently flat. The Euro Stoxx 600 closed little changed. Oil prices pushed up, with Brent crude reaching USD76 per barrel, but have since retreated and are back below USD74.

The economic calendar has been light. US ADP private payrolls rose by 143k in August, above the 125k consensus and breaking a five-month run of smaller increases.  Wage figures in the survey slowed – for those who changed jobs, earnings rose 6.6% y/y, a more than three-year low, and wages for those staying in jobs eased to 4.7% y/y.

The data have a poor record of forecasting non-farm payrolls – due on Friday – but that didn’t stop US Treasury yields jumping higher after the report. Yields were already pushing higher, unwinding some of the previous day’s panic move and they pushed higher still after the ADP report.  The curve is steeper, with the 2-year rate up 2bps to 3.62% and the 10-year rate is up 5bps to 3.77%.

Currency movements have been small overnight apart from notable yen weakness and some underperformance by the NZD and AUD. After meeting with BoJ Governor Ueda, new PM Ishiba said “I don’t think the environment is ready for an additional rate hike”, an unhelpful comment for the yen since many already question the independence of the BoJ. After the comments, Ueda told reporters “while we will adjust the degree of monetary easing if the economy and prices match our forecasts…I also told him we want to look carefully to see if that really is the case because we have sufficient time to do so”. USD/JPY has steadily risen from around 144 to just over 146 following this exchange and the yen looks increasingly ripe for another speculative selling attack.

While the NZD recovered back over 0.63 yesterday afternoon after the risk off-inspired fall following Iran’s attack, the NZD has steadily fallen since the NZ close and trades near 0.6260. The AUD has settled below 0.69 and NZD/AUD has fallen to 0.9100.  While NZD/JPY has strengthened to 91.6, the NZD is modestly weaker on the other key crosses.

Some NZD weakness might be attributed to a 50bps cut at next week’s RBNZ MPR becoming a consensus view, as other banks followed BNZ’s move to call 50.  The OIS market is now priced at 46bps, suggesting high market odds for a larger cut, to be followed by another 50bps cut in November, ahead of the extended summer break between meetings.

NZGB and swap yields showed little net change yesterday, with some rates falling just 1bp in net terms, with lower rates in the morning session on global forces, reversing course in the afternoon.

The economic calendar remains light, with most interest in the US ISM services report tonight, alongside the latest weekly jobless claims figures.