Global asset markets continue to see large swings. After posting one the largest ever one day gains, the S&P has fallen sharply and is currently ~3% lower, albeit off the session lows. Investors are concerned about escalating trade war between the US and China. China now faces an effective 145% tariff rate after the latest hike. Front end treasury yields dropped sharply, and the US dollar fell against G10 currencies. Oil prices fell close to 3% with Brent crude trading back towards US$63. Meanwhile gold prices reached a fresh record of US$3175 per troy ounce.
US CPI was softer than expected in March. Headline inflation fell 0.1% m/m, its first monthly decline in close to five years. The annual headline rate dipped to 2.4%. The core reading was also below consensus estimates increasing 0.1% m/m and 2.8% y/y. Consumer prices have remained largely unaffected by the tariffs imposed on China. The initial estimates for the core PCE deflator, the Fed’s preferred inflation metric, is 0.13%. If correct this would be the smallest rise since November
The US treasury curve continued its large gyrations. The curve steepened with 2-year yields falling 5bp while the longer end moved higher in yield. Lower front-end yields reflected the risk off tone with investors increasing the amount of Fed easing for 2025 to ~90bp from 75bp yesterday. The US$22bn 30-year auction saw decent demand and cleared ~2bp below the prevailing market level.
European bond markets are generally lower in yield. Gilts outperformed after an announcement by the Bank of England that it will now auction short dated bonds from its Asset Purchase Facility, rather than longer maturities, reflecting the recent market turmoil. 30-year gilts closed 15bp lower in yield at 5.42%.
The US dollar had a large fall with the dollar index declining almost 2% and nearing its September low. Some linked the fall to repatriation flows out of US assets. The decline was steady through the offshore session and broad-based against G10 currencies. The yen and Swiss franc outperformed given the broader risk backdrop. EUR/USD also made strong gains, trading above 1.12 to the highest level since mid-2023. The 1.12-1.13 region has formed a series of highs over the past few years.
The weaker US dollar contributed to a decent rally for NZD/USD which traded up towards 0.5750. The NZD lost ground against the euro and yen while NZD/AUD made modest gains. In a prepared speech, RBA governor Bullock urged patience while policy makers assess the impact of the new trade regime on the economy.
In China, the monthly CPI and PPI data for March were broadly in line with expectations and highlight ongoing deflationary pressures. The economy faces further headwinds from the escalating trade war with the US. The PBOC has been incrementally moving the USD/CNY fix higher despite the additional retaliatory tariffs from the US.
Chinese authorities are expected to increase fiscal and monetary support. It was announced that China’s leaders were meeting to discuss additional stimulus in response to higher US import levies. Bloomberg reported that measures for housing, consumer spending and technology would be discussed.
The main dynamic in NZ fixed income yesterday was a reversal of the previous sessions outsized curve steepening move in line with offshore markets. The swap curve pivoted around the 5-year point for the second day running with 2-year rates closing 11bp higher while 10-year rates dropped 8bp to 4.06%. The 2y/10y curve retraced form 111bp back to 92bp.
The weekly government bond tender was in focus after the recent market volatility. In any case the tender attracted decent demand from investors. There were NZ$1.4 billion of bids for the NZ$500 million on offer. The May-2028 line had a better cover ratio, and cleared 2bp below the prevailing market rate, while The May-2034 cleared near market mid-price.
The government curve also flattened. 10y-year government bonds closed 11bp lower and saw only a modest narrowing in ASW spreads after the significant widening in the past week. Australian 10y bond futures are little 3bp higher in yield terms since the local close yesterday, which suggesting a modest upward bias, for NZ yields on the open.
In the day ahead, the domestic focus will centre on the manufacturing PMI which rose to 53.9 in February. US PPI data for March will allow analysts to finetune forecasts for the core PCE deflator which is released at the beginning of the next month. Michigan consumer sentiment is expected to extend its recent decline while medium term inflation expectations are expected to increase further.
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