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Markets unmoved by string of data releases. Demand for US Treasuries and USD into month-end. NZ commodity prices rise to a record high. NZ economy overheating; another +$32 bln in household lending

Markets unmoved by string of data releases. Demand for US Treasuries and USD into month-end. NZ commodity prices rise to a record high. NZ economy overheating; another +$32 bln in household lending

There has been a lot of economic data to digest but the market has been unwilling to move too much ahead of the key US employment report at the end of the week. US equities are flat and the US 10-year rate has drifted lower.  The USD was broadly stronger going into the 4pm London fix. The NZD has been one of the better performers overnight, but languishing below 0.70, even if higher on the crosses.

US ADP private payrolls data were slightly stronger than expected at 692k for June, cementing in expectations for a solid employment report on Friday (the consensus is currently just above 700k), even though this indicator has had a run of overstating the official figures and its usefulness as an indicator is questionable. Indeed, last month’s ADP figure was revised nearly 100k lower, as the model feeds in actual weaker employment. Other US economic data were mixed, with the Chicago PMI and pending home sales coming in much weaker and much stronger than expected respectively, albeit more reflecting noise in the data than anything else.

Canada GDP contracted by less than expected in April, down only 0.3% m/m during a period of lockdowns, with timelier indicators suggesting that the June quarter overall will still show reasonable growth. Germany’s unemployment rate continued to trend lower, while euro area core CPI inflation remained soft at 0.9% y/y. Yesterday, China PMI data were consistent with economic growth stabilising, with the manufacturing gauge little changed in the expansion zone at 50.9 and the non-manufacturing slipping to 53.5 but off a much higher base. Japan industrial production plunged in May, but this was put down to a shortage of chip supply affecting auto production than soft demand.

None of this data has mattered to the market, currently fixated on the outlook for US monetary policy and feeding into that the key employment report to be released Friday night. More Fed speakers have added their 2-cents worth but we won’t bore readers with the details as none of that matters either. The dataflow – mainly on the labour market and progress towards making up for the job losses during the pandemic – will dictate the policy response.

US equities are ending the month on a flat note, but the monthly and quarterly returns for the S&P500 have been strong again, in the order of 2% and 8% respectively. The Euro Stoxx 600 index closed down 0.8%, wrapping up a 1.4% monthly gain and 5.4% quarterly gain.

Month-end flows might be a factor in US Treasury yields drifting lower. The 10-year rate is down 3bps for the day to 1.44%, towards the lower end of its trading range and on track for a monthly fall of 15bps.

There also looks to have been some month-end buying for the USD, which was broadly stronger heading into the London fix. JPY, one of the better performers for the month, has been one of the weakest performers overnight, seeing USD/JPY blast up through 111 to reach a 15-month high. EUR is also on the soft side, down 0.4% to 1.1850.

USD strength saw NZD drifting down to 0.6965 ahead of the fix before settling around 0.6985, one of the better performers overnight – being higher on all the crosses – but the worst of the majors for June, down nearly 4%. Yesterday we noted the lack of fundamental justification for that performance.  While we noted the rise in risk appetite and higher NZ-global rate spreads we didn’t mention the rise in NZ export commodity prices, which has also been a feature of the landscape over the past month. The latest weekly ASB NZ commodity price index was released yesterday and it showed a record high when measured in SDR terms, breaking above the 2014 high. So another reason to be puzzled by NZD weakness of late.

Speaking of commodity prices, Bloomberg’s index has risen a chunky 1.5% for the day, driven by a surge in soybean and corn prices, following the release of a USDA acreage report showing farmers intended planting far less than feared. Corn is up 7%, which bodes well for NZ dairy prices as higher US feed costs are a factor for global milk pricing.

In domestic data, the final reading of the ANZ business outlook survey confirmed that the key risk facing the economy was some overheating, with the own-activity indicator running above average and the selling pricing intentions indicator running at a record high. Taken literally, the latter is indicative of annual inflation tracking well above 5%. Firms indicated intense cost pressures, suggesting that it was only so long before selling prices would have to rise. The data supported an earlier, rather than later, start to the monetary policy tightening cycle.

Adding to that policy sentiment, RBNZ data showed household lending rising by 11.4% yoy, the strongest annual growth in 13 years, and equating to some $32b of extra lending for the sector. The justification for RBNZ stoking up borrowing with its current policy settings has long passed.

NZGB and swap rates were flat to down 1bp across the curve. The LSAP for 2037 bonds was poorly offered, a sign of a lack of sellers in the market, even with $100m of that bond due for tender today. More signs that RBNZ QE policy is not needed.

The economic calendar in the day ahead remains busy. The market will be most interested in whether US jobless claims fall or remain sticky and the ISM manufacturing survey. The head of the Bank of England gives his annual Mansion House speech this time tomorrow which will be important for UK monetary policy outlook. Outgoing BoE Chief Economist and a hawkish outlier on the MPC made his view clear overnight, urging a change in policy tack with inflation track to finish the year close to 4%, adding to the central-banks-asleep-at-the-wheel thematic.

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4 Comments

Inflation rising
QE not needed
Rates too low
Overheating
Borrowing at record levels
November interest rate rise coming

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A debt fuelled recovery become overheated through a surplus of cash. Somewhere somehow by someone it needs to be paid back.

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Inflation rising and economy overheating -> the OCR must be raised now, at least to 1%. There are no excuses left.
Not doing so is a clear breach of the RBNZ mandate. Maybe we need to sack Orr now, and put in his place somebody else in charge who is willing to take notice of economic reality and of the longer term health of the NZ economy.
See also https://www.stuff.co.nz/business/125617698/economy-approaching-full-emp…
ANZ said that "There is a growing risk that the Reserve Bank’s “biggest regret” could soon be waiting too long to raise rates".
There must be an emergency raise of the OCR now. Not doing it now will force the RBNZ to increase it at a much steeper rate later on.

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Here is the rapturous announcement in December 2017 of Orr's appointment by Robertson :
https://www.rbnz.govt.nz/news/2017/12/adrian-orr-appointed-as-new-reser…

"I consider that he has the skills necessary to successfully lead the Bank through a period of change." Yeah, OK. Can we have a different change please?

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