US ISM manufacturing weaker, but with noted supply issues and inflationary pressures. Some reversal of Friday's move - US equities higher, USD lower

The week has begun with a reversal of some of the price action seen on Friday night, with US equities higher and the USD lower. A softer than expected ISM manufacturing index has supported a slight fall in the US 10-year rate and weaker USD dynamic. The NZD is back with a 0.72 handle.

Ahead of another busy week, newsflow to begin the week has been light with the UK, Japan and China on holiday.  The S&P500 is currently up 0.5%, even with big tech stocks Facebook, Amazon and Netflix dragging the chain and with the Nasdaq index down 0.4%.

The US ISM manufacturing index unexpectedly fell from a multi-decade high by 4 points to 60.7, with the national index defying the regional surveys which suggested a small increase. But this wasn’t through a lack demand, with purchasing managers reporting that their companies and suppliers “continue to struggle to meet increasing rates of demand due to coronavirus impacts limiting availability of parts and materials”. Order backlogs are up to their highest level in more than forty years, while the prices paid index is at a more than decade high, consistent with rising inflationary pressure.

The final reading for the euro area manufacturing PMI was revised down slightly from the flash estimate, but at 62.9 in April it was still at its highest level in the 24-year history of the survey. Like the US survey, the message was one of demand running ahead of supply and widespread and high inflationary pressure.

Fed Chair Powell gave a speech but not one directed at financial markets with the title of “Community Development”, so there was nothing new to digest.

The USD was already in a downdraft, after its apparent month-end flows-driven rally on Friday night, but the soft ISM reading nudged it down further, alongside a small fall in the US 10-year rate.  The 10-year rate fell 4bps to below 1.58% following the release, but has since settled around 1.60%, down 2bps for the day. The USD shows broadly based losses, with the BBDXY index down 0.35%.

After treading water through the Asian trading session, the weaker USD has helped the NZD push back up through the 0.72 mark, and up 0.7% or so from last week’s close to 0.7210. The AUD shows the same pattern, trading up to 0.7765, with NZD/AUD flat around 0.9280. After being a laggard last month, GBP has started May on a positive note, at least initially defying an apparent seasonal pattern which has seen the currency down for the month of May for the past eleven years straight.  GBP is up 0.6% to regain the 1.39 handle. EUR, JPY and CAD show more modest gains.

The NZ rates market traded heavy yesterday. Even with the RBNZ tapering its bond purchases, the Bank is still buying at least as much as NZDM is issuing each week at its tenders, which is keeping NZ-global rate spreads suppressed and there is little appetite in the market to take them lower. NZGBs were 2-3bps higher across the curve and payers of swaps were out there at the longer end, with 5-10 rates up 1-2bps.

This afternoon the RBA gives a policy update and a likely unchanged policy stance won’t perturb the market.  There will be more interest in what Deputy Governor Debelle says in his Thursday speech and the RBA’s forecast update on Friday. The economic calendar picks up a gear from Wednesday.