US equities initially made gains after news that China would incentivise more infrastructure investment, but the move has since reversed; NZD has underperformed and is sitting just under 0.66; US bonds have largely mirrored those moves in equities

There hasn’t been much movement, on net, in major markets overnight.  US equities initially made gains after news that China would incentivise more infrastructure investment, but the move has since reversed.  The NZD has underperformed for the second day running and is sitting just under 0.66.  US CPI data tonight is the focus. 

Yesterday, China announced that it would ease restrictions on local governments using so-called special bonds to finance infrastructure investment, in a further move to support the economy amidst the trade war with the US.  It is a reminder that China will certainly take steps to cushion the impact on the economy if Trump does decide to go ahead with higher tariffs on the remaining $300b of Chinese imports.  The news of more Chinese stimulus measures boosted Chinese equities (CSI300 +3%) and, at least initially, broader risk appetite.  The S&P500 increased almost 1% shortly after the US market opened, extending its strong run since the start of last week, although the moves in US equities have since faded.  The S&P500 and NASDAQ are now close to flat on the day. 

The G20 Summit later this month, at which Trump and Xi are expected to meet, looms as the major risk event for the market.  Comments from Trump overnight suggest he isn’t yet in the mood to compromise.  Trump said “we had a deal with China and unless they go back to that deal I have no interest.”  The market hopes that the President will change his tune after meeting Xi, similar to his abrupt U-turn on Mexican tariffs. 

US bonds have largely mirrored those moves in equities, with the 10 year Treasury yield reaching a high of 2.18% in the New York morning before reversing that move to be unchanged at 2.14%.  Trump renewed his attack on the Federal Reserve on Twitter, saying “the Fed interest rate way too high, added to ridiculous quantitative tightening! They don’t have a clue!”  Despite Trump’s vocal criticism of the Fed, which could create the perception that he is threatening the independence of the central bank, the market continues to price around an 80% chance of a rate cut at the July meeting.   The market prices close to 60bps of rate cuts by year-end. 

The USD is down slightly overnight (DXY -0.1%, BBDXY -0.05%).  There was no market reaction to US data.  US small business confidence increased more than expected, with the detail revealing a surprising increase to capital investment plans.  Small business confidence is below the levels reached last year, but remains very high on a historic basis.  US core PPI met expectations, but the market is much more focused on US CPI, which is released tonight. 

The GBP was the second-best performing currency over the past 24 hours – up 0.3% to 1.272 – helped by a strong labour market report, including a larger than expected increase in wage growth (to near its highest level since 2008 on the measure that excludes bonuses).  On Brexit, the Labour party tabled a cross-party motion intended to prevent a no-deal Brexit.  The motion will likely be voted on tonight and, were it to pass, it will allow opposition parties to control the parliamentary agenda on June 25th, allowing them to introduce a bill forcing the government to avoid a no-deal.  The Conservative party, with support from the DUP, has a wafer thin majority in parliament, so only a few defectors would be sufficient to see the motion passed. 

The AUD is close to flat to the day, as it continues to hover below 0.70.  The NAB business survey yesterday revealed a sharp rise in business confidence, likely reflecting the surprise victory for the Liberal-National coalition at the election, but a further fall in business conditions.  Our NAB colleagues noted that the details of the survey weren’t encouraging and suggest the economy continues to display weakening momentum. The Australian market is much more focused, however, on the release of the labour market report tomorrow, where a weak outcome is likely to cement a July RBA rate cut.  Our NAB colleagues look for a more positive employment report, at least this month, and forecast a 40k increase in employment, boosted by temporary workers hired for the election, and a tick down in the unemployment rate to 5.1%. 

The NZD is, for the second day running, the worst performing currency in the G10.  The NZD is 0.4% lower, at 0.6580.  We nudged down our Q1 GDP forecast to 0.6% after yesterday’s NZ manufacturing data, although that’s still higher than the RBNZ’s 0.4% MPS forecast.  GDP is released next Thursday and is the last major piece of domestic data before the RBNZ meeting later in the month.  The NZ swaps curve barely moved yesterday, with the market continuing to price the terminal OCR at around 1.1%. 

The focus in the session ahead is the release of US CPI.  ECB President Draghi also speaks in Frankfurt, and the market will watching for any comments on the ECB’s willingness to ease policy further.

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