Markets are trading with a slightly cautious tone, ahead of President Biden meeting with the House Speaker to discuss the overhanging debt ceiling issue, and the key CPI report tonight. US equities show modest falls, US Treasury yields are a touch higher, and the USD is slightly stronger. The NZD has traded in a tight range below 0.6350.
Soon after we go to print, President Biden will meet with House Speaker McCarthy to address the debt ceiling issue, with the best-case scenario being a small extension that delays the risk of a missed interest payment on US debt and little chance of any enduring resolution. However, heading into the meeting, McCarthy argued against an extension and the clock will likely continue clicking down over the coming weeks, with the “X-date”, dependent on government cashflows. Treasury Secretary Yellen has been warning that the nation could exhaust its ability to meet all payment obligations by 1 June without action.
Even though risk sentiment is a bit softer, price action across assets has been modest, ahead of the US CPI release tonight. Data released have been on the weak side of expectations. Yesterday, Chinese trade data showed an unexpected 7.9% y/y slump in imports in April, while export growth of 8.5% was inflated by the impact of the Shanghai lockdown a year-ago, and the monthly track implied weaker export momentum in April as well. The data played to the view of weaker global demand and weak underlying domestic demand in China after looking through the initial post zero-COVID bounce in activity.
The US NFIB small business survey was weak, with the headline index down to a decade-low of 89.0, with weaker sales expectations, economic outlook, and capex intentions, amongst others. The availability of loans improved a little, albeit from a decade-low, but the cost of funds on short-term loans increased 70bps to 8.5%.
US equities show a small fall and US Treasury yields have pushed a little higher, extending their recent sell-off. Trading ranges have been tight by recent standards and the 2-year rate is up 2bps to 4.02% and the 10-year rate is up 1bp to 3.52%.
NY Fed President Williams kept the door open to further rate hikes and he noted that there will be a lot of data between now and the June FOMC meeting – he will be particularly focused on assessing the evolution of credit conditions and their effects on the outlook for growth, employment and inflation. He forecast a need to keep the restrictive stance of policy in place “for quite some time” and his baseline forecast does not see any reason to cut interest rates this year, against current market pricing which shows 2-3 rate cuts in the second half.
ECB Governing Board members have also been out in force with hawkish commentary. Schnabel said “we have more work to do” and year-end rate cuts seen by the market are highly unlikely. Kazaks still sees “quite some ground to cover” and the market pricing in rate cuts next year were “significantly premature”. Others have made similar comments.
The Australian Budget showed much better fiscal metrics than projected six months ago, with a small expected surplus for FY23 (0.2% of GDP) and small projected deficits in the coming years. Much improved debt projections have seen further downward revisions to the bond tender programme and net new funding for FY24 more than halving relative to the previous Budget to $36b. There was little market reaction, with the improved fiscal outlook well anticipated.
We’ve previously noted the extreme contrast between NZ and Australia’s external accounts and the fiscal accounts also show Australia in a much better relative position. The NZ government’s financial statements for the nine months ended March showed a deteriorating fiscal position and tracking much worse than projected – a shortfall in tax revenue reflecting a weaker economy and driving a core operating deficit of $3.4b, running $2.5b higher than projected. Gross debt of $143b was 37.7% of GDP, up $27b over the past year, or nearly 5 percentage points of GDP.
While contrasting fortunes between NZ and Australia’s external and fiscal accounts are on the radar, the currency market doesn’t reflect NZ’s poor relative position. NZD/AUD remains near the top of its recent range and currently sits at 0.9365. Currency moves over the day have been modest. The USD is generally better bid and the NZD has slipped a touch to 0.6335. The AUD has slipped to 0.6765 and EUR is trading back below 1.10. GBP has been one of the better performers, holding its ground above 1.26.
NZ’s poor fiscal update didn’t perturb the domestic rates market, with some outperformance on a cross-market basis in the face of higher global rates. Short-end NZGBs were little changed, while the 10-year rate rose by only 3bps to 4.17%. The swaps curve also showed a steepening bias, with the 2-year rate flat at 5.08% after opening 6bps higher, and the 10-year rate up 5bps to 4.25%.
On the calendar, the US CPI report due tonight is the headline act for the week. The consensus is picking a core increase of 0.3% m/m, although a 0.4% increase is also widely expected. The breakdown will be important, with focus on the services side. Figures close to consensus would not be weak enough to provide comfort on inflation.
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1 Comments
Our growing current account deficit is holding us down/back & will probably mean noticeable interest rate differentials between here & Aussie for the for-seeable future. We just can't seem to sell enough of our products & services to afford the first world lifestyle we want. Perhaps if central govt supported businesses exporting stuff instead of the growing pool of deadheads gathering at the bottom of the food chain we might start to turn things around. For a country with so many natural resources we do a very good job not using them to our advantage, year in & year out.
Roll on someone than can think outwardly about this nations future, instead of all the toxic internals floating around the medias & mastheads these days.
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