The key market move overnight has been USD strength for no obvious reason, with notable weakness in EUR and GBP despite a backdrop of slightly higher European yields and slightly lower US yields. US data have been mixed, while a number of Fed speakers have been out in force reiterating the view that rates need to go higher to beat down inflation. The NZD took a brief look above 0.63, but USD strength sees it back down towards 0.6250.
US equities have moved in and out of positive territory all day and the S&P500 is currently flat for the session. There has been some mixed US economic news and plenty of Fed-speak, creating some choppy price action in US Treasuries, but the net move has been modest, with the 2-year rate down less than 5bps and the 10-year rate down 2bps to 2.87% for the day, or little changed from where the NZ market closed. European yields have pushed higher, up 1-2bps for key 10-year rates, following the chunky lift in rates in the previous session.
US existing home sales fell 5.9% m/m in July, the sixth consecutive monthly fall, cumulating to a 26% drop since January. The data continues the poor run of housing market data showing a deep downturn underway in the sector, with activity falling at a much steeper rate than expected, driven by higher mortgage rates and elevated prices. On a more positive note, jobless claims were 14k lower than expected at 250k, helped by a 10k downward revision for the prior week. And the Philly Fed manufacturing gauge showed a surprising bounce-back in August, going against the recent plunge in the equivalent New York index.
The Conference Board’s leading index isn’t widely reported as it compiles 10 indicators that have already been released, but for the record it fell for the fifth consecutive month, making it well on its way towards flagging a pending economic recession, consistent with the message of the inverted 2s10 yield curve.
FOMC members have been out in force giving interviews. Bullard said he was leaning towards another 75bps hike next month, moving expeditiously to a policy rate that will put downward pressure on inflation. He still favours getting the Fed Funds rate to 3.75-4% by year end, saying “I don’t really see why you want to drag out interest rate increases into next year”. He is upbeat about the economic outlook and said market speculation over rate cuts next year is “definitely premature”.
George said that the case for continuing to raise rates remains strong but acknowledged that the pace of rate hikes remained up for debate. Daly said that it was too early to declare victory on inflation and favours the Fed Funds rate rising to a little above 3% by year-end and a little bit higher next year. Kashkari noted the Fed has more work to do to reduce inflation “urgently” and doubted if the Fed can cut inflation without a recession.
None of this Fed talk has had much impact on the market with their views already known. While US equities and Treasuries haven’t moved by much, the USD is showing some notable strength, with dollar indices up in the order of 0.6-0.7% on the day. Both EUR and GBP are down nearly 1% for no obvious reason other than the euro area and UK economies are basket cases, something that is already widely acknowledged, given the big energy crunch across Europe. On that note, European gas futures rose just under 7% to a fresh record high of EUR241/Mwh. Germany has slashed the VAT rate on gas sales to households, but that looks like a sign of desperation than anything else and will do nothing to reduce demand for gas which is urgently needed.
EUR is trading at 1.0090 and looks like it could easily test below parity again in the not-too-distant future. GBP has fallen to 1.1935. Commodity currencies have done better than others overnight, with only modest falls against the USD. Oil prices are up nearly 3%, with Brent crude back over USD96 per barrel, following surprisingly strong data from the EIA. US crude stockpiles fell 7.06m barrels last week, US exports rose to a record high of 5m barrels a day and there were signs of rising gasoline demand after the recent chunky fall in prices.
The NZD took a brief peek above 0.63 but is back down trading towards 0.6250. The AUD recovered to 0.6970 after showing weakness following an employment report, but is back down around 0.6920. Employment fell by over 40k in July, but weaker participation meant that the unemployment rate fell to a fresh multi-decade low of 3.4%. Under the hood, the data still seemed consistent with the RBA needing to do a lot more work on rates to help relieve pressure on wage inflation.
NZD crosses are fairly flat for the day, apart from gains around 0.5% against EUR and GBP to 0.62 and 0.5240 respectively.
In other news, yesterday the US announced that it and Taiwan will start negotiations for a bilateral trade and investment initiative over coming months to deepen ties on a range of issues including technology and agriculture. China’s foreign ministry has condemned the talks and a spokesman urged the “US not to miscalculate on this”, seeing it as a threat to China’s sovereignty.
NZ long-term rates were driven much higher yesterday by global forces, while the short end of the curve was a bit stickier, creating a curve steepening bias. The 10-year NZGB and swap rates were up in the order of 11-12bps, while the 2-year swap rate was up only 3bps.
In the day ahead we expect to see another large monthly trade deficit print for NZ that will take the annual deficit to a fresh record high approaching $11b. On the global calendar watch out for CPI data for Japan and retail sales data for the UK and Canada.
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