Global yields have pushed lower overnight, led by Europe, while equities are mixed. The US dollar is firmer, as European and commodity currencies underperform.
The ECB Forum in Sintra, Portugal was in focus overnight where the ECB’s Lagarde, the Fed’s Powell, and BoE’s Bailey took centre stage. All voiced concern about the uncertainty surrounding inflation and imperfections of economic models and how to deal with supply shocks.
Powell said the US economy is in ‘strong shape’ and well positioned to handle tighter policy, noting the Fed’s aim is to slow growth to give supply a chance to catch up to demand. He essentially endorsed market pricing, noting that financial markets are helping do the Fed’s job for it as futures markets align with the Fed’s dot plot. Bailey said the BoE will act more forcefully if inflation persistent, but both he and Powell left the door open regards specifics for upcoming meetings. Lagarde reiterated the ECB will consider the anti-fragmentation tool at its next meeting in July and the pace of tightening is data dependent.
Global bond yields fell post the remarks, most notably in Europe, with the market seemingly looking for more hawkishness and perhaps disappointed with the lack of specifics. German bund yields fell circa 10-13bps across the curve, while peripheral spreads narrowed with the likes of Greek 10-year yields falling 21bps.
US 10 year yields are currently down more than 7bps, near 3.10%, having pushing above 3.18% earlier in the session.
The Fed’s Mester noted that the Fed is ‘just at the beginning’ of raising interest rates and that ‘there are risks of recession’. She wants to see the Fed Funds rate reach 3% to 3.5% this year and ‘a little bit above 4% next year’.
Global yields were choppy ahead of the ECB forum falling initially as regional and national German CPI data generally undershot expectations. German annual CPI inflation fell to 8.2% against expectations of 8.8%. But the market didn’t dwell on that for too long, as the undershoot was heavily influenced by temporary government relief measures such as lower fuel taxes and discounted public transport costs, with yields lifting as Spanish annual CPI inflation hit 10%, above the 8.7% expected, and with EU economic confidence data printing a touch above expectations.
Earlier in China, President Xi reiterated that Covid Zero policy is the most ‘economic and effective’ for China. This saw a dip in risk sentiment with the CSI300 closing down 1.5% on the day, breaking a recent run higher.
Equities elsewhere were mixed. European equities open lower and stay there. The Eurostoxx 50 index closed down 1%. In the US, the major indices have struggled for direction. The S&P500 is currently close to flat, as is the NASDAQ.
In currencies, there wasn’t a huge amount of movement although there was a general case of European underperformance and a stronger USD. After being range bound through the European data, EUR took a one-way ticket south on the back of lower yields, post the ECB forum discussion, falling from around 1.053 to under 1.045 currently, down about 0.7% on the day.
The US dollar is around 0.6% stronger, setting up another month of advance following its brief breather in May. A pullback in global yields did nothing to stop the seemingly relentless weakness in JPY. USD/JPY tested another new high since 1998, near 137, before easing back a touch.
Commodity currencies mildly underperformed on the overnight. NZD is a touch lower than this time yesterday, hovering above the 0.62 mark and eyeing month and year-to-date lows just under that figure.
Yesterday’s above consensus 0.9% lift in Australia’s May retail sales data, with higher prices adding to nominal growth, generated no more than a passing blip for the AUD, in a docile local session. NZD/AUD sits broadly unchanged this morning near 0.9040.
On domestic rates, NZDM announced its bond tender schedule for July yesterday which, as expected, showed weekly issuance doubling from the current $200m to $400m. The balance of issuance will be skewed to the short and 10 year part of the curve, with long end issuance remaining broadly the same. NZGB’s slightly underperformed swaps on the day, with a small increase in yields across the NZGB curve against a small decrease in rates across most of the swaps curve. Swap yields started a little higher yesterday after moves in the prior offshore session but edged lower during the day to close between flat and 2 bps down across the curve.
This morning sees RBNZ Chief Economist Conway’s speech released at 11.30am. Its titled ‘Housing (still) matters – the big picture’. There will certainly be interest in this, but whether it contains any policy implications to move markets only time will tell.
In the day ahead the economic data calendar is full. Last month’s ANZ Business Outlook survey registered a bigger slump in confidence, stalling activity expectations, OK
investment intentions, robust employment intentions, less-high pricing intentions, but a further rise in general inflation expectations to record highs. This gave mixed/contrasting messages about how far the RBNZ will need to lift interest rates and it remains to be seen whether this afternoon’s June survey results give a clearer steer, on balance.
Globally, China PMIs are expected to lift, following looser COVID restrictions. In the US, personal spending data and the PCE deflators hold some interest, with the latter still likely to show uncomfortably high inflation pressure.