Focus on Fed speakers overnight. Market conditions calmer; Equities higher, UST yields range bound. NZD outperforms, well up through 0.70 as USD softens

Market movements have been more modest compared to the past week, a sign of calmer conditions returning as investors further digest last week’s FOMC policy update. Equity markets show modest gains, US Treasury rates have been rangebound. The USD is on the soft side, helping the NZD crack the 0.70 mark and trade around 0.7025.

The market remains focused on Fed-speakers as it digests last week’s hawkish surprise (or more appropriately expressed, less-dovish surprise). Chair Powell’s written testimony to Congress was released after we went to press yesterday and largely followed the tone of his opening remarks at last week’s press conference. His Q&A session has just begun as we go to press so we’ll have to see if there’s any market reaction. There has been little reaction so far.

In addition, we’ve heard from a number of Fed speakers over the past 24 hours. Unlike the more hawkish comments from Kaplan and Bullard the previous day, New York Fed President Williams’ views looked more centrist. He noted that some progress had been made since December toward the Fed’s employment and inflation goals, but he still didn’t think it’s close to the “substantial further progress” condition that was set out before tapering of bond purchases would begin. On potential rate hikes he noted “that’s still quite a ways off from today” before even getting to any discussion.

Cleveland Fed President said that the Fed wasn’t at the point where it needed to think about scaling back accommodation to safeguard financial stability. San Francisco Fed President Daly’s comments also looked to toe the party line in saying “substantial further progress is within our line of sight” and “it’s time to start talking about how we might taper asset purchases…but talking about rate changes right now isn’t even on the table”. She alluded to late-2021 or early 2022 as being a possible timetable for beginning to taper asset purchases.

On the economic data front, US existing home sales slipped for the fourth consecutive month in May, albeit were slightly stronger than expected. Off a high base, the cumulative drop has extended to 13% and more falls are anticipated, as forewarned by falling mortgage applications. Prices rose by 23.6% y/y. Euro area consumer confidence continued to trend higher, rising to its highest level in over three years.

US equity markets show modest gains, with the S&P500 currently up 0.5%, now back to within ½% of the mid-month record high. The Treasuries market has settled after some whippy trading conditions of late, with the 10-year rate trading within a range of 1.46-1.51%, currently near the bottom edge.

Brent crude hit the USD75 mark for the first time since April 2019 during Asian trading but has since slipped a little lower. Focus turns to the OPEC+ meeting next week and whether the group will propose an increase in supply in August.

In currency markets the USD has a soft underbelly, falling against all the majors apart from the yen, with USD/JPY up 0.3% to 110.60. The NZD has outperformed, showing further signs of retracing last week’s heavy loss. It broke up through the 0.70 mark in the past few hours and has settled around 0.7025. The recovery in the AUD hasn’t been as great, reaching 0.7550 and seeing NZD/AUD back up through 0.93. NZD/JPY is up 0.8% for the day to 77.7 and up nearly 2% from last week’s low. Movements in EUR and GBP have been modest, the former up to 1.1940 and the latter to 1.3940, so NZD crosses here are also stronger.

The domestic rates market was driven by global forces, with curves steepening, as seen during the prior US session, with NZGB and swap rates up in the order of 3-9bps across the curve. There is some interest in the 8am announcement from NZDM on the July bond tender schedule, which we think will ramp up to $500m a week, based on the full year programme outlined in the May Budget. Also interesting will be whether the RBNZ leaves its LSAP at $200m next week (an announcement will be made Friday). If so, then the market will need to start to absorb more net bond supply than it has been used to for some time, an upward force on NZGB rates.

In the day ahead flash estimates for June for Markit global PMI data are released which are generally expected to show some slippage for the manufacturing sector and some further recovery in the services sector across Europe and still-high levels for the US.