After a soggy start to the second quarter, global equities have stabilised. The S&P is up 0.3%, rebounding from earlier losses, after treasury yields retraced following data that pointed to a slowdown in the US services sector. In currency markets, the US dollar fell sharply. Gold prices extended to fresh record highs, above US$2290 per troy ounce, having gained more than 15% since mid-February.
Federal Reserve chair Powell’s speech on the economy didn’t provide additional information on the outlook for monetary policy. He reiterated the central bank remains data-dependent, and that the market should not expect rate cuts, until policy makers gain greater confidence inflation is moving sustainably towards target.
US ISM services index fell to 51.4 in March, from 52.6 in February, which was weaker than expected. The prices paid sub-index fell sharply to the lowest level since March 2020, in a sign that price growth is moderating. The overall index was the lowest level since last December.
The US economy added 184k private sector jobs in March according to the ADP report, which is the biggest monthly gain since July. However, it is worth noting, this series doesn’t have a strong relationship with non-farm payrolls, which is released at the end of this week.
Eurozone CPI increased 2.4% y/y in March, below consensus estimates of 2.5%. Meanwhile core CPI increased 2.9%, also below consensus. The inflation data supports expectations the European Central Bank (ECB) will cut rates in coming months. The central bank has signaled it is ready to ease monetary policy in June conditional on the absence of any unforeseen developments. This aligns with market pricing, which implies the ECB will cut rates by 25bps in June and the policy rate will be nearly 90bps lower by year end.
US treasury yields moved higher initially following the ADP jobs report. 2-year yields peaked near 4.75%, before reversing lower to 4.68%, after the soft ISM services data. 10-year treasuries reached a fresh high for the year, above 4.4%, before retracing.
The US dollar struggled to gain traction, even as treasury yields moved higher aligned with the ADP data. However, the subsequent reversal lower in yields contributed to sharp fall in the dollar index, which is down more than 0.5%. The yen underperformed within G10 currencies and is little changed in the offshore session. NZD/USD advanced, aligned with the broad-based US dollar weakness, and traded back above 0.6000. The NZD largely matched the moves in other major currencies, outside of the yen, and is stable on key cross rates.
It was a volatile session for NZ fixed income in the local session yesterday. After initially moving higher in yield, reflecting the moves in offshore markets, NZ government bonds rallied strongly following the pricing of the new 15 May-2035 nominal maturity that was issued via syndication. 10-year NZGB yields ended unchanged at 4.65%. Bonds outperformed swaps – 10-year swaps closed 6bps higher – as the swap market absorbed hedging-related flow associated with the syndication.
There was strong investor demand for the new maturity. The syndication book size, at final price guidance, exceeded NZ$17.0 billion. NZDM issued NZ$4.5 billion, only slightly below the volume cap of NZ$5 billion. The new maturity was issued at a spread of 6bps over 2034s which was the midpoint of the initial price guidance (+4 to +8 bps). As is typical in a syndication week, the tender scheduled for today has been cancelled.
Australian 3 and 10-year bond futures are ~2bps higher in yield overnight, suggesting a modest upward bias for NZ yields on the open.
Building permits for February is the only domestic data release today. Otherwise, it is a quiet international calendar. There are several Fed speakers, who are unlikely to impact markets, given the steady stream of commentary recently from US policy makers.
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