Market movements have been subdued overnight, with limited moves in equity, bond and currency markets. The US 10-year rate continues to hover just below the 1.50% mark. Commodity currencies have outperformed, with the NZD continuing to recover from its sell-off last week.
Economic data remains robust and consistent with a rapid global recovery. The European composite PMI, a timely indicator of economic activity, hit its highest level in 15 years, with the services sector increasingly catching up to the strength in manufacturing as countries take steps to remove Covid-related restrictions. IHS Market observed that manufacturers had seen “rapid increases in raw material and fuel costs” while services sector firms were needing to pay higher wages to get staff on board. In the UK, the composite PMI remained close to record highs while, in the US, the manufacturing PMI hit a new record high and while services activity slipped, it remained at a historically elevated level. On a less positive note, US new home sales continue to fall, as foreshadowed by the decline in mortgage applications.
Atlanta Fed President Bostic was the latest Fed official to out himself 2022 rate hike ‘dot’. Bostic added that the economy was “close to meeting” the ‘substantial further progress’ benchmark needed to start tapering. So far, most of the hawkish noise has come from the regional Fed presidents, rather than the Board of Governors and Chair. On that note, Fed Governor Bowman highlighted that over 10 million people were still out of work and, in her view, inflation pressures should ease over time.
The market hasn’t shown much response to the economic data, with investors already braced for a super-strong recovery this year. The US 10-year rate has nudged up to 1.49%, 2bps higher than the previous session’s close. The S&P500 and NASDAQ have both made small gains (+0.1% and +0.3% respectively) with both indexes continuing to hover around their all-time highs.
Commodities are also generally firmer, with copper prices bouncing 2.3% after China’s first sale of copper from its strategic reserves was smaller than expected. Crude oil prices have moved slightly higher, with Brent trading around $75/barrel, after the weekly DOE report showed a substantial, 7.6 million barrels, drawdown in crude oil inventories in the US. The onset of the summer driving season in the US is expected to add to demand pressures. Oil prices pulled back from the day’s highs after Saudi Arabia’s Energy Minister said that the OPEC+ cartel had a role to play in “taming and containing inflation”, potentially foreshadowing future supply increases.
Commodity currencies have continued to recover from their post-FOMC sell-offs, supported by the broadly positive backdrop in commodity and risk markets. The NZD and AUD are top of the currency leader board, with both currencies up around 0.25% over the past 24 hours. The NZD is now more than a cent higher than its post-FOMC lows and is trading this morning around 0.7040. Both the NZD and AUD have shown little reaction to Covid-19 developments. In Sydney, additional restrictions have been put in place after more community cases were recorded while the revelation that an infected Australian traveller visited a number of tourist hotspots in Wellington over the weekend has led the government to move Wellington up to Covid Alert Level 2 until Sunday.
The other notable mover in currency markets has been the JPY, which fell 0.3% to its lowest level since the convulsions of March last year. USD/JPY is just below 111 this morning. The USD indexes are barely changed, as is the EUR.
There was a modest pullback in NZ swap and bond rates yesterday, amidst downward pressure on global rates and possibly some nerves around the change in Covid-19 alert levels for Wellington. While the market has grown increasingly confident that the RBNZ will start raising rates in the first half of next year, the ever-present risk of another lockdown continues to linger. The 2 and 5-year swap rates were 3bps lower, to 0.72% and 1.36% respectively, while the 10-year swap rate fell 2bps, to 1.90%.
New Zealand Debt Management yesterday announced the government bond tender schedule for July, revealing an increase in nominal bond tenders from the current $300m/week to $500m/week. The increase to bond supply was in line with our expectations and didn’t lead to any immediate market reaction. Over time, we would expect supply-demand forces to lead to some upward pressure on (mainly longer-term) government bond yields, with supply increasing next month and the RBNZ set to stop its bond buying before it starts raising the OCR. More immediately, attention will turn to the RBNZ’s week-ahead bond buying announcement tomorrow for its response.
It’s a busy session ahead, with five Fed officials on the speaker circuit and US durable goods orders and initial jobless claims amongst the data released. The Bank of England’s meeting will see no change in policy although the market will be closely listening for any hawkish undertones around the outlook.