Global rates lower after their recent rise; Treasury yields down 5-7bps, German 10-year rate falls for first time in over two weeks. Second-tier US economic data paint softer economic picture and lower oil prices support the move

Global rates have pushed lower, after their recent rise, helped by a set of weaker US second-tier data. The USD is broadly weaker, with the NZD and AUD outperforming overnight, the NZD making up some of the losses seen after the much weaker than expected CPI print and back trading just under 0.62.

Investors have been attracted back into the bond market after their recent sell-off. Germany’s 10-year rate fell for the first day since 5-April, down 7bps to 2.45%.  US Treasuries have been supported by a run of softer second-tier economic data on the Philly Fed survey, jobless claims and existing home sales, with yields down 5-7bps and the 10-year rate currently at 3.54%.  Lower oil prices might also be a factor in supporting the move down in rates, as they continue to retreat.  Brent crude is down 2½% to USD81 per barrel, getting close to fully retracing the stronger price in the aftermath of OPEC+’s surprise output cut at the beginning of the month.

The Philadelphia Fed business outlook index fell 8pts to minus 31.3 to its lowest level in about three years against expectations for a 4pt lift.  The direction was a complete contrast to the much stronger than expected Empire manufacturing survey earlier this week, highlighting how volatile and divergent these small regional surveys can be. However, the detail wasn’t as weak as suggested by the headline figure, with a weaker capex outlook, but stronger new orders, employment and shipments readings compared to the prior month.

Initial jobless claims continued to push higher, to 245k last week.  Continuing claims continued to rise, with a rising third of States showing a lift of 30% y/y, suggesting a broadening of the slowdown in the labour market, keeping alive the view that the US economy is heading for economic recession. Existing home sales fell by 2.4% in March and the 0.9% y/y drop in median house prices was the weakest in over a decade.

The issue of the US debt ceiling and the politics around whether or not it will be extended in time before the Treasury runs out of cash, has been in focus this week with data on the tax take providing ambiguity over whether the Treasury can make it until June-15, the next big tax take day. If there is enough cash in the coffers until then, that could potentially delay default risk until later in the summer. Concern about the risk of default is causing significant variation in T-bill yields. Investors were willing to accept just 3.19% on an auction of one-month bills, which safely mature ahead of any possible default day, while eight-week bills, which mature after June-15, were sold at 4.85%. Debt ceiling shenanigans and potential market volatility will become more in focus over the next four to six weeks.

US equities are weaker, amidst further earnings reports, including Tesla, which investors gave a big thumbs down to further cuts in prices which are squeezing margins. The stock is currently down about 10%, a drag on the S&P500’s fall of 0.7%. A number of mid-sized regional banks downgraded their guidance on net interest margins as they spend more to attract and retain deposits, but they gave no reason for renewed panic in the sector, with changes in deposits generally no worse than expected.

In currency markets, the USD is broadly weaker, with the fall coming after the weaker data. The AUD and NZD have been the best performers of the majors overnight, the AUD pushing up through 0.6770 overnight and currently just below 0.6750. The NZD was broadly weaker after the big downside miss to the CPI (see below), falling to around 0.6150 near the NZ close, recovering back up through 0.62 overnight and currently at 0.6175.

NZD crosses are all weaker from this time yesterday, with NZD/AUD down to 0.9160, its lowest level since end-February. NZD/EUR found some support just over 0.56 and the same for NZD/GBP around 0.4950. NZD/JPY is back just below 83.

NZ’s Q1 CPI showed a welcome downside surprise, rising 1.2% q/q and 6.7% y/y, well below consensus of 1.5% and the RBNZ’s top-of-the-range estimate of 1.8%.  Annual tradeables inflation of 6.4% was a full percentage point below the RBNZ’s estimate while non-tradeables inflation of 6.8% was 0.3 percentage points below. The key messages were that inflation was probably past its peak, weaker than the RBNZ previously thought, but both headline and core measures still remaining too high for comfort and well above target.

While there wasn’t much reaction to near-term OIS pricing, with the May meeting still pricing a very high probability of the OCR being raised by 25bps to 5.5%, the data reinforced the likelihood of that being the peak for the cycle. The 2-year swap rate fell 9bps to 5.13%, with the natural focus turning to how long the OCR is likely to remain at its peak and how fast it falls when the easing cycle begins. On that score the market sees some chance of the easing cycle beginning late this year, but not really until next year before significant easing takes place (about 130bps through 2024). Longer-dated swaps fell 7bps.

The NZGB curve showed a flattening bias, with short-dated bonds down 8-9bps, the 10-year rate down 7bps and ultra-long bonds down 5bps. There was again strong demand for the bonds tendered, with bid-cover ratios of 3x-4x and all clearing through pre-tender mids.

In the day head, of interest will be in Japan’s CPI and global PMI data tonight, with services sector PMIs still seen to be in expansionary mode while manufacturing sectors still showing signs of contracting.