US Treasury yields continue to push higher on less concern about banking sector and stronger data - Empire manufacturing survey much stronger than expected. NZGBs outperform

US Treasury yields have pushed higher for the third successive trading session in the wake of less concern about the banking sector and another positive data print, this time the Empire manufacturing survey. This has given the USD a boost, seeing the NZD trade back below 0.62.

Global rates continue to push higher, led by US Treasury yields. Following on from Friday’s chunky moves, the 2-year rate is currently up 9bps to 4.19% and the 10-year rate is currently up 8bps to 3.59%. The market has inched further towards pricing in a full rate hike for the Fed early next month, with 22bps now priced, while expectations for easier policy in the second half continue to fade.

There are a number of reasons one can point to for the lift in rates – some follow-through from the solid earnings reports from the big banks on Friday, management conference calls that downplay the potential for a credit crunch, increased corporate bond supply and a positive Empire manufacturing survey.

The Empire (NY) manufacturing survey for April blasted up to +10.8 from minus 24.6 and the expected minus 18 level, to reach its highest level since April, with new orders rising from minus 21.7 to +25.1, a one-year high. The survey can be volatile, but at face value it shows no ill-effects from the recent banking sector turmoil and challenges the narrative that the US economy is on the verge of recession. There wasn’t much in the survey for the doves, but prices paid dropped from 41.9 to 33 while there was only a small 2pt lift in the employment index to minus 8.

Separately, the NAHB homebuilder sentiment index rose for the fourth straight month to 45, as expected, still low after a deep downturn. The commentary said that although credit conditions were tight, there was no evidence that the pressure on the regional bank system had worsened the lending environment for builders and developers.

There was much anticipation about Charles Schwab’s earnings report, being at the vanguard of the banking sector turmoil last month. There was some relief as the report showed bank deposits in line with expectations (dropping 11%), a 25% jump in total net new assets and a lift in net interest margin. M&T Bank, a regional NY bank, reported stronger results supported by higher net interest income. By contrast, State Street missed earnings and customers withdrew a surprisingly large net $26b from investment products.

The results lifted share prices for Charles Schwab and M&T bank, while State Street is down over 10%. The S&P500 is currently down modestly, with Financials outperforming again.

In currency markets, higher Treasury yields have boosted the USD, with the dollar indices up in the order of 0.4-0.6%.  The top three majors have seen similar moves, with EUR down 0.6% to 1.0925, GBP is down 0.3% to 1.2375 and USD/JPY up 0.5% to 134.40. The NZD shows a similar move, down 0.4% to 0.6180. The AUD has slightly outperformed, down by only 0.1% to 0.67, seeing NZD/AUD nudge down further to 0.9220, continuing to unwind the rally seen in March through to early April.

Yesterday, NZ swap rates were up 3-6bps across the curve, led by the short-end, with the 2-year rate closing at 5.09%. It was a different story for NZGBs, which outperformed following the index duration extension after the maturing of the April-2023 bonds. Short-dated bonds were up 2-3bps while the 10-year rate was little changed at 4.10%, and the ultra-long bonds showed slightly lower yields – a good performance in the context of the sell-off of US Treasuries on Friday night. Despite annual food price inflation lifting to 12.1% y/y in March, the monthly result was weaker than expected, which supports the consensus view of Q1 CPI likely coming in below the RBNZ’s 1.8% q/q, in data due on Thursday.

In the day ahead, the calendar is full. REINZ market data are likely to continue to paint a poor picture of the NZ housing market. China activity data are expected to show stronger growth in March on the post-COVID re-opening. Tonight sees the release of UK labour market data, US housing starts and permits, and Canadian CPI.