The key market mover to start the new week has been a tumble in US Treasury yields, with the 10-year rate trading below 1.15%, following a slightly softer than expected US ISM manufacturing index. Oil prices fell by over 3% after the report and gains for the S&P500 were pared. In currency markets, the AUD and JPY have outperformed, a combo not often seen, while the NZD has tracked sideways.
The US ISM manufacturing index fell for a second month in July to 59.5, down from 60.6 in June and shy of the expected increase to 61.0. The new orders and employment components pushed higher and, while production was lower, the index of customer inventories fell to a record low, boding well for future output. The industry comments in the release continued to convey the message of production constraints, shortages of raw materials and difficulty in finding labour.
While the ISM survey suggests that growth might have peaked, the level remains historically high. So while the survey suggests little to fear itself, it follows other evidence of “peak growth”, the softer official China PMI manufacturing survey at weekend and the Caixin version yesterday. After the ISM survey was published, US Treasury yields began to tumble, sending the 10-year rate down 7bps to a low of 1.1475%. The rate has currently recovered to 1.17%. down 5bps from the NZ close. With the 2-year rate only down slightly, the 2s10s curve has flattened to around 100bps.
The US debt ceiling suspension officially ended at the weekend so expect to hear more about this over coming weeks and months until a new ceiling is agreed. Until then, debt will be capped at the current level of $28.5 trillion and special measures to hold it at that level have already begun. The US Senate is heading toward passage this week of a $550b infrastructure bill, with Majority Leader Schumer saying that it would pass “in a matter of days”. The cost of the programme will not be met by raising taxes but by various means such as selling oil from the Strategic Petroleum Reserve, tapping unspent funds previously allocated elsewhere and extending some budget cuts far into the future.
China is seeing the biggest outbreak of COVID19 in six months, with a broad spread of new cases spanning almost half of the 32 provinces. Cases numbers are up over 300 so far, but as we’ve seen with the delta variant elsewhere, numbers can escalate quickly and its wide spread is of some concern.
Oil prices tumbled following the release of the ISM survey, driving Brent crude down over 3% to a low of USD72.30, with the survey adding to some concern about potentially weaker demand alongside reports of spreading COVID19 across Asia.
In currency markets the two top performing majors are JPY and AUD, an unlikely due. The 0.4% fall in USD/JPY to 109.30 we can put down to weaker risk appetite and lower rates, while the 0.3% lift in AUD to 0.7365 represents a small recovery after being the biggest loser through July, with some traders noting a squaring of positions ahead of the RBA announcement this afternoon.
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The NZD is flat at 0.6975, trading sideways centred at that level and within a 40pip range. EUR and GBP also show little movement, while lower oil prices have dragged down CAD by about 0.3%. The turnaround in fortunes for the AUD has seen the NZD/AUD cross fall from above the 0.95 mark to start the week, down to 0.9470.
The domestic rates market was quiet yesterday with the NSW holiday in Australia. Rates across the swaps and NZGB curves were flat to within 1bp of Friday’s close. The Australian 10-year bond future is down about 4bps in yield since the NZ close, which will set the tone for the NZ market open.
The RBA policy update this afternoon comes amidst a major lockdown and thus deterioration in domestic economic conditions since the last less-dovish missive a month ago. The consensus seems to be that the Bank will reverse its decision to taper bond purchases from $5b to $4b a week from September. If that’s the case, the optics will be that the RBA is helping support the recovery, but the reality is that back in the real world, fiddling with QE is pretty meaningless.