Global rates push higher. USD and JPY underperform . NZ government bond yields down to a fresh record low

It has been another quiet day in financial markets. US equities are treading water around record high levels and currency markets show modest movements, with the USD and JPY underperforming. Global rates have pushed higher, while NZ bond yields fell to a fresh record low yesterday.

There isn’t a lot of news to report. S&P futures during the Asian trading session were up as much as 0.6%, taking a positive cue from the outcome of US-China trade talks. Top trade reps from the US and China talked to discuss the phase 1 trade agreement. After the call the office of the US trade representative released a statement noting the significant increases in purchases of US products by China as well as future actions needed to implement the agreement. It ended with “both sides see progress and are committed to taking steps necessary to ensure the success of the agreement”. Clearly, President Trump isn’t looking to “blow up” the trade deal ahead of the November election.

There has been no follow through overnight. The S&P500 opened to a fresh record high, but has since hovered in and out of positive territory, currently up 0.2%.

Dampening market enthusiasm, US consumer confidence unexpectedly dropped, falling to a 6-year low, with current conditions dropping by much more than the expectations component. The weakness likely reflected the weaker jobs market, with consumers indicating that jobs were harder to get.  On a more positive note, US new home sales blasted up by 13.9% to reach a 14-year high, well above consensus, continuing the theme of a hot housing market, driven by record low mortgage rates and people moving to the suburbs.

In other data, Germany’s IFO survey showed slightly higher levels of business confidence, consistent with the view of the economic recovery being on track.

Oil prices are nearly 2% higher as a couple of tropical storms barrel towards the oil refineries in the Gulf of Mexico.  As a result, gasoline prices have hit a 5-month high.

UK, French and German 10-year rates are up in the order of 5-6bps for no obvious reason other than their bond markets offer no value whatsoever and any “investor” would be locking in large negative real returns for the next decade at current prices. The US 10-year Treasury rate pushed up to as high as 0.71%, before peeling off to 0.68% and still up 3bps for the day.  Rates have been trending higher this week ahead of Fed Chair Powell’s keynote address at the annual Jackson Hole conference Thursday night, NZ time.

Currency movements have been well-contained overnight, albeit with signs of further general USD weakness across the board. However, JPY has been the worst performing after the rise in global rates, the currency’s correlation with global rates remaining well intact. USD/JPY is up 0.3% to 106.30.

The softer USD backdrop sees the NZD and AUD both up in the order of 0.4% to 0.6550 and 0.7195 respectively, although still really tracking largely sideways this week so far. For the day, GBP has been the best performer, up 0.7% to 1.3150, seeing NZD/GBP down at 0.4980.

NZ bond yields fell to a fresh record low yesterday. NZ Debt Management successfully completed a syndication of the 2027 bond, which saw demand of over $17.5b at the tight end of price guidance for the capped $4b issue. Yields fell across the curve, with the 10-year rate down to 0.54%, trading well below US and Australian 10-year rates. Of course, the only reason rates are this low because of the RBNZ’s massive money-printing operation to drive them artificially low across the curve. There will be four more RBNZ bond purchase operations before fresh bond supply is tendered by NZ Debt Management. The NZ swaps curve was little changed, rates nudging up by 1bp at the long end of the curve.