US Treasury yield are lower after US CPI data details point to some inflation cooling. Equities have oscillated, with the S&P500 currently a touch higher. JPY has been the outperformer in currencies amid generally limited net movement across currencies. US dollar is marginally weaker. NZD is up 0.4%, near 0.6360. NZD/AUD is testing 0.94. Oil prices are down around 1½%.
US CPI inflation for April came in close to expectations with 0.4% m/m gains in both headline and core ex food and energy measures (expectations for the latter edging up to 0.4% by release time). Higher energy prices (oil) drove the lift in headline as expected from the prior month’s 0.1% m/m. But the details provided encouragement that some underlying pressures are easing, with rent increases below the past year’s average and services prices excluding housing and energy – a measure closely watched by Fed Chair Powell – posting the smallest advance in many months. Goods prices were boosted by used cars which is not expected to continue.
The cosmetics of annual headline inflation showing a 4-handle for the first time in two years aided with the softer tone narrative, with the 4.9% print a tick lower than previous and just under expectations. Core annual inflation also eased a tick to 5.5% matching market priors.
US Treasury yields were lower and steeper post CPI release as the market trimmed the residual chance of further Fed hikes and built in a greater chance of more and earlier cuts later this year. Fed pricing is getting close to half a chance of a cut by July and now consistent with at least 3 cuts by year end and 4 cuts by January. US 2-year Treasury yields are down about 12 bps, generating some curve steepening with 10-year yields down around 8bps to near 3.44%. The re-steepening yield curve post inversion is often a sign of contraction ahead.
US equities have been mixed. The S&P500 is currently up around 0.3% driven by tech but with financials and energy among the laggards. The latter not helped by a near 2% drop in oil prices as data showed a build in US crude inventory as demand concerns linger. The KBW Bank index is around 1.7% lower following a few days of less movement. Tech has benefited more from the dip in yields, with the NASDAQ currently up around 0.8%.
The broader risk backdrop hasn’t been helped by limited progress on the US debt ceiling issue. Yesterday’s meeting between President Biden and House Speaker McCarthy brought no obvious progress. The biggest outcome was agreement to talk again on Friday.
Elsewhere, the ECB’s Villeroy appeared less hawkish than comments from some of his counterparts of late, noting ‘more marginal’ distance is left to cover in raising interest rates. That is different to others like Schnabel who recently discussed ‘quite some ground to cover’. Bond yields in Europe were typically down 5-7 bps, although a marginally lesser 3-6bps across the UK Gilt curve ahead of the BoE meeting tonight. The BoE is expected to hike 25 bps taking Bank Rate to 4.50%, with market pricing building in around 1½ more hikes over coming months.
There has been generally limited net movement in currency markets, beyond some volatility around US CPI release. The US dollar fell around 0.5% post the data but then pared losses to be marginally softer on the day.
JPY has been the outperformer, aided by lower global bond yields. USD/JPY is down around 0.7% to around 134.20 from near 135.40 pre-US CPI. EUR poked above 1.10 after the US data before easing to be back to broadly unchanged on the day around 1.0980. Similar trajectory for GBP, now unchanged around 1.2620 awaiting the BoE meeting tonight.
NZD reflected the broader USD moves, popping up to around 0.6380 before trimming gains to opening this morning around 0.6360. AUD is little changed, seeing NZD/AUD continuing to edge higher testing above 0.9400 overnight and currently just under that level.
Domestic interest rate markets were relatively quiet yesterday ahead of the US CPI. Bond and swap rates were generally 1-3 basis points lower across the curves, amid a touch more steepening with 2-year rates down nearly 3bps while 10-year rates were down closer to 1bp. Overnight offshore moves would suggest some downward pressure on domestic yields on the open today.
Looking ahead, we get NZ food prices (and rents) for April today. We have another firm monthly gain pencilled in on account of recent poor weather – albeit within a wide range of possibilities. Any material deviation from expectations has the potential to alter Q2 CPI calculations.
Offshore, the BoE meeting will be the focus tonight while China’s CPI and PPI inflation and US PPI inflation and jobless claims data are due. There is also more central bank speak to monitor overnight in the form of the Fed’s Waller and the ECB’s Schnabel, De Cos, and Guindos.
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