USD shows meaningful broad-based weakness; NZD and AUD outperform. Oil prices rise despite OPEC+ agreeing to ramp up production schedule; Copper up over 5%. Soft US ADP payrolls; Fed's Brainard hawkish, hoses down talk of a September pause

A notable market move overnight has been broad-based weakness in the USD, with higher risk appetite and a weak ADP payrolls print thrown into the mix. Strength in commodity prices have supported the NZD and AUD both well up over 1%.  US Treasury yields have been well contained, even with more hawkish talk from Fed Chair Brainard.

Risk sentiment is positive for reasons not obvious and this is reflected more in equities, currencies and commodity markets but not for US Treasuries.  Yesterday, the market saw the strength in the ISM manufacturing index as bad news, resulting in lower US equities and a stronger USD. Overnight, we’ve seen a reversal of that, with a weak ADP payroll report driving US equities higher and the USD lower. Good news is seen as bad news for the market and bad news is seen as good news for the market. But confusing the picture is that the US 10-year rate was higher yesterday, on the positive economic news, but has barely moved overnight on the bad economic news, and even with the Fed’s Brainard pouring cold water on a Fed pause in September.

ADP private payrolls rose by only 128k in May, with a 45k downward revision to April and smaller firms (with less than 50 employees) shedding 91k jobs. This painted a soft picture of the labour market, ahead of the more important non-farm payrolls report tonight. Separately, the weekly initial jobless claims figure was 10k lower than expected at 200k, but the recent trend has been higher.

Fed vice-Chair Brainard ran the party line of two 50bps increases at the next two meetings in June and July, but pushed back on a pause thereafter, saying “right now it’s very hard to see the case for a pause…we’ve still got a lot of work to do to get inflation down to our 2% target”. This follows a comment by Atlanta Fed President Bostic last week of a possible pause in September, which some in the market have latched on to, as it followed the last set of minutes showing that some members saw a possible slowdown in pace of tightening later in the year.  Brainard made it clear that bringing inflation down was the top priority and she would need to see a consistent string of decelerating monthly prints on core inflation before feeling more confident.

US equities opened on a weak note, not helped by Microsoft downgrading its earnings outlook on account of USD strength affecting its overseas earnings, another company to add to the list saying the same.  But the market has since bounced back strongly, with the S&P500 currently up close to 1½%. Both the short end and long end of the Treasuries curve have been tightly contained and both show little movement, the 10-year rate currently at 2.91%.

There has been some interesting action in the commodities market. During the Asian trading session, the FT reported that Saudi Arabia has indicated to western allies that it is prepared to raise oil production should Russia’s output fall. This follows the EU’s ban on importing seaborne cargoes of Russian oil and a deal with the UK to ban the insurance of ships carrying Russian oil later this year. Overnight, the outcome of the OPEC+ meeting was an uplift to the supply plan, with production set to lift by 648,000 barrels per day for July and August, larger than the previously scheduled 400,000, a sign that Saudi Arabia has finally relented to pressure from the US to increase production. Relations between the US and Saudi Arabia look to have improved, with President Biden set to visit the Kingdom later this month.

Despite the projected lift in supply, oil prices are modestly higher on the day, with OPEC’s move seen to signal concerns about a tight market, some doubt that OPEC+ can deliver on the production increase, and US crude stockpiles falling more than 5m barrels last week, according to the EIA. Brent crude is currently USD117.50 per barrel.

Copper prices are up over 5%, the most in two years, fuelled by optimism that the easing of lockdown restrictions in China will unleash demand, although that doesn’t seem a satisfactory explanation for the one-day move as the reopening of Shanghai has been well telegraphed.

Broad-based strength in commodity prices is partly due to a much weaker USD. The EUR, GBP, and CAD are all up about 0.8% overnight, while the gain for the AUD and NZD has been in the order of 1.4% and 1.2% respectively. The extent of the moves is somewhat surprising, and not entirely explainable.

The NZD is up to around 0.6560, close to the highs seen during early May and late May so it’ll be interesting to see if it can push any higher or will meet stiff resistance at that level. The AUD is up to 0.7260, also near the high in early May. NZD/AUD is down to 0.9030, but other NZD crosses have broken some big figures, up through 0.52 against GBP, through 0.61 against EUR and through 85 against JPY.

Against a backdrop of upside global forces, NZ rates were well contained under the circumstances.  There was good bidding at the bond tender and NZGBs continued to outperform swaps. The 10-year NZGB closed the day up 2bps to 3.67% while the 10-year swap rose 4bps to 3.99%. Some curve steepening was evident, with 2-year swap up 2bps to 3.89%.

In the day ahead NZ building work data will help inform the construction sector’s contribution to Q1 GDP. Tonight, the headline act will be the US employment report, where the consensus is picking a solid 325k gain in non-farm payrolls in May, driving the unemployment rate down to a pre-COVID low of 3.5% – a figure below that would see the rate at its lowest level since the 1960s. Average hourly earnings are expected to show a slight fall in the annual increase to 5.2% y/y. There will also be interest in the ISM services index, expected to show a small fall to 56.5.