Weaker US PPI inflation, higher jobless claims play to theme of weaker US economy and moderating inflation pressures, adding in expectations of just one more Fed rate hike, USD remains under pressure; US Treasury yields slightly higher

The USD has remained under pressure following the soft CPI print and backed up by weaker PPI inflation and jobless claims continuing to trend higher. Against a higher risk appetite backdrop, the NZD and AUD have been the biggest beneficiaries, up around 1½% on the day, the NZD up through 0.63 and the AUD approaching 0.68. US Treasury yields show modest moves higher while US equities are over 1% higher.

Following on from a soft CPI print, at least at the headline level, US PPI data were weaker than expected, the headline figure dropping 0.5% m/m (flat result expected), the largest fall since the early stages of the COVID pandemic, taking the annual increase down to a more than 2-year low of 2.7%. The ex-food and energy figure fell 0.1% m/m and rose 3.4% y/y. The data showed some clear slowing in the trend for services sector inflation, portending weaker core CPI inflation ahead.

Separately, initial job claims rose by 11k to 239k last week, slightly more than expected, continuing to trend higher as the labour market softens. There were signs of tech job layoffs coming through in the figures, with the rise for California making up more than a third of the increase in claims.

The data play to the theme that the Fed’s tightening cycle should be nearly over, although pricing for the May meeting remained at +18bps, implying a good chance of one more 25bps hike and then the Fed being done. Treasuries have been well contained by recent standards. A modest steepening bias is evident, with the 2-year rate up 2bps to 3.98% and the 10-year rate up 6bps to 3.45%.

The theme of the end of the Fed tightening cycle and weaker US economy continues to impact the USD, on track for its fifth weekly fall in a row and the DXY index within 0.2 of the February low, a break of which would only encourage further weakness led by chart followers.

The themes at play are supporting risk appetite, with the VIX index closing in on 18, very much at the low end of the range seen this year, and well below the 30 level it got to at the height of the banking sector turmoil. US equities have gained over 1%. The NZD and AUD have been the key beneficiaries with gains in the order of 1½% for the day, nearly all of it coming after the NZ market close. The NZD is trading back up through 0.63, while the AUD has been knocking on the door of 0.68.

NZD/AUD fell to 0.9250 after the strong Australian employment report yesterday, but has recovered all that loss and some, to trade just under 0.93 this morning. The strong report showed a 53k gain in employment and the unemployment rate remaining at 3.5%. The clear message was that the labour market remained very tight and plays to the theme that the RBA is not necessarily finished hiking this cycle. Australian rates pushed slightly higher after the release.

Also doing no harm to the commodity currencies, China trade data were unexpectedly strong, with exports in March up 14.8% y/y and imports down only 1.4%. At face value, the data pointed to strong foreign demand, with easing supply disruptions post the zero-COVID policy helping lubricate exports.

Against a backdrop of a weaker USD, the euro traded at its highest level in over a year, up through 1.1050. Of the majors, GBP has risen the least, even if trading at a fresh 10-month high through 1.2530. While not market moving, UK GDP was only flat in February after the 0.4% gain in January (revised slightly higher), with strike action acting as a drag on the economy. Q1 overall is on track for a positive quarter. NZD/GBP is tracking back up through 0.50 and NZD/EUR is back above 0.57.  The yen has only made a modest gain against the USD, seeing NZD/JPY over 1% higher at 83.75.

NZ Finance Minister Robertson spoke on Bloomberg TV in the early hours this morning. He noted a price tag of $9-10b for Cyclone Gabrielle that will be spent over many years to rebuild the damage, He wanted to minimise any additional borrowing, while not ruling it out, adding that funds could be diverted from existing programmes and he wanted to explore all available options before levying a tax to fund the rebuild. Robertson admitted that the economy might already be in recession, but he anticipated a speedy recovery.

Yesterday, domestic rates were higher, with swap rates up 3-4bps and NZGBs up 1-4bps, broadly in line with the move seen in Australia.

In the day ahead, NZ manufacturing PMI and net migration data are released. US retail sales is the key release tonight, where the consensus is picking further weakness in March, following the soft February data. Focus turns to the US earnings season which kicks off tonight, with a number of banks reporting.