Newsflow has been light, but US equities are currently in positive territory after yesterday’s weakness. Much weaker than expected UK CPI data pushed down UK rates, which spilled over into lower European rates and Treasuries. The USD is broadly stronger as the Trump trade continues. The NZD regained some poise after a dip following soft CPI data that saw the market bring forward NZ rate cuts. While the NZD is languishing around 0.6060, NZD/AUD and NZD/GBP crosses are higher.
US equities show a modest gain in early afternoon trading. Within the mix, banks have outperformed, with Morgan Stanley the latest to impress investors with a strong result, following good results by JP Morgan, Goldman Sachs and Citigroup. There has been a rotation into smaller cap stocks, with the Russell 2000 index up 1½% against a current 0.3% gain for the S&P500
In economic news, UK CPI inflation data came in two-tenths lower than consensus, with the headline rate falling to 1.7% y/y and the core rate down to 3.2%. The UK joined a growing group of major countries that have seen inflation falling below 2% that include Canada, Germany, France, Italy, Switzerland and Spain. The downside miss for the closely watched services CPI was even greater, three-tenths weaker than consensus at 4.9% and six-tenths weaker than the BoE’s forecast of 5.5%.
The weaker inflation data reinforced the market’s view that the BoE would cut rates by 25bps at the November meeting, now fully priced, and with a high chance of a follow-up 25bps cut in December. UK gilt yields fell by more than peers, led by the short end, with gilts down 9-11bps across the curve. GBP fell 0.7% following the release and much of the move was sustained, trading just below 1.30 for the first time since mid-August.
Lower UK rates spilled over into other markets, with Germany rates down 4bps across the curve and US Treasury yields pushing lower as well, although only showing a small 1-2bps fall for the day. The 10-year Treasury yield briefly dipped below 4% and currently trades at 4.01%.
The weaker GBP spilled over into a weaker euro while broad dollar strength remains evident, the big dollar continuing to find support as the Trump trade continues as his chances of winning the Presidential election are seen to improve. The larger betting markets of Kalshi and Polymarket imply odds of a Trump victory at 57% and 59% respectively, while the smaller market of PredictIt puts his winning chance at 54%.
EUR has pushed further below 1.09 to a fresh 2½ month low around 1.0860. Lower global rates have restrained yen weakness, but USD/JPY continues to threaten a move above 150. AUD has been the weakest of the key majors we follow since this time yesterday, falling to 0.6665. The NZD weakened to a low of 0.6040 in the aftermath of a soft NZ CPI print (see below), before recovering a little, and with no further weakness overnight. It currently sits around 0.6060. It is fair to say that broad USD strength has been a larger factor than the CPI result on the currency. NZD is higher against GBP and AUD, the latter cross up to 0.9090. NZD/JPY is flat at 90.7, fully recovering the post-CPI dip and NZD/EUR is only down a touch at 0.5580.
NZ CPI data were broadly in line with market expectations, with a small downside miss relative to RBNZ estimates. Inflation has been on a steady downward path for over a year, with the annual increase of 2.2% now close to the mid-point of the target range. With the likelihood of inflation falling further against the backdrop of rising excess capacity, the market saw increased pressure on the RBNZ to bring the OCR down to a neutral level sooner rather than later.
The market priced in an increased chance of the Bank stepping up the pace of easing at the November meeting, with 58bps priced by the OIS market at the close, suggesting a more than one-third chance of a 75bps hike. Even that would leave monetary policy restrictive through the summer break. The swaps curve steepened, with lower rates led by the short end, with the 2-year rate down 9bps to 3.62% and the 10-year rate down 5bps to 4.04%.
NZDM announced the syndication panel for the tap of the nominal 2030 bond, raising speculation that the issue would be launched next week. The prospect of the increased lump of supply, probably around $4b or higher, hindered performance of NZGBs, resulting in bonds cheapening against swaps. NZGB rates were down just 3-4bps across most of the curve, with slightly larger moves at the very short-end, reflecting the bringing forward of rate cut expectations.
On the calendar today, Australia’s employment report is released, where the market sees the unemployment rate steady at 4.2%. China’s housing minister, joined by officials from the PBoC, MoF and NFRA, will hold a press briefing, likely providing more details on measures to support the property sector.
ECB GC members have recently guided a 25bps rate cut at tonight’s meeting, which is fully priced, so focus will be on the scale and scope for further rate cuts. US retail sales are expected to show a modest 0.3% m/m increase in September, while initial jobless claims will remain distorted by the impact of the weather and Boeing strike.
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