Risk appetite is weaker, not helped by further weak China data that has dragged down commodity prices and whacked the NZD and AUD, down below 0.63 and 0.67 respectively. Soft US PPI and another sharp lift in initial jobless claims have helped support US Treasuries, while the BoE hiked 25bps as expected.
Yesterday, China inflation and credit data were soft, with the PPI falling 3.6% y/y and the CPI barely higher at 0.1% y/y. After a strong start to the year for credit growth, aggregate financing and new bank lending in April were well shy of expectations. Households repaid more than they borrowed, short-term household lending contracted, and corporate borrowing was also weak. The data, adding to weak imports growth noted earlier in the week, played to the view of weak underlying growth in the economy, after accounting for the post zero-COVID policy bounce, and suggested the PBoC would need to ease further to support the economy.
Commodity prices are broadly weaker on fears of how a softer Chinese economy will impact on global demand, with notable falls in industrial metals, including a 3½% fall in copper prices to their lowest level this year. The yuan is weaker with USD/CNY up 0.3% to 6.95 and the NZD and AUD have underperformed, both down over 1% overnight, against a backdrop of broad USD support. This sees the NZD back below 0.63 and the AUD sub-0.67. The move lower should also be seen in the context of it not being obvious why these currencies were so strong this week through to yesterday. The NZD is back to where it started the week.
It also remains to be seen why NZD/AUD is back above 0.94 in a week which highlighted divergent fiscal fortunes for NZ and Australia, to go alongside the contrasting balance of payments fortunes, NZ being in a much worse relative position. To that we might add in a freedom of information release yesterday from the RBA that showed the Bank considered alternative policy scenarios where the cash rate peaked at 4.8%, which would see a faster return to bringing inflation back to the target range. The scenario was closer to the policy choices made by other dollar-bloc countries. Such a scenario could still play out if inflation surprises to the upside, with core CPI inflation higher in Australia than other countries. A closing of NZ-Australia interest rate spreads looks like a necessary condition for a weaker cross rate.
US economic data overnight conveyed a picture of weaker inflation and jobs market. Soft core PPI inflation of 0.2% m/m in April supported the CPI data yesterday showing a weaker inflation trajectory, while initial jobless claims rose 22k last week to 264k, its highest level since October 2021 – a decisively higher trend in this series becoming more evident by the week and leading indicators suggesting plenty more folk joining the ranks of the unemployed ahead. The data support the view that the Fed is now done for the tightening cycle – if not it has over-tightened – and a reversal of policy will be required in the second half.
US Treasury yields are down across the curve, with the risk-off tone supporting a larger move at the longer end of the curve, with the 10-year rate at 3.39% after trading as low as 3.34% overnight. US equities are modestly lower. As a reminder that the banking sector turmoil isn’t over yet, PacWest Bancorp said it saw a fall of 9.5% in total deposits last week and its share price is currently down over 20% as a result, spilling over into weakness for other regional banks.
The BoE raised its policy rate by 25bps to 4.5%, as expected, in a 7-2 vote with the usual doves on the MPC voting for no change. A tightening bias was maintained, the Bank noting that it was monitoring indications of persistent inflationary pressures and if there was more evidence then further tightening would be required. The Bank made some significant forecast revisions, with GDP growth and inflation both higher, even if base effects drive CPI inflation sharply lower over coming months from 10% to 5% by the end of the year. The market slightly pared back expected policy easing over the rest of the year, but still sees another full hike priced and a good chance of the second hike. The 2-year rate is down 9bps, slightly greater than seen elsewhere in Europe and GBP has slightly underperformed EUR. GBP is trading just over 1.25 and EUR just over 1.09.
The lower global rates backdrop has seen JPY perform better than others, although USD/JPY is still slightly higher at 134.50. The NZD is weaker on all the key crosses apart from NZD/AUD holding up just over 0.94.
In a pre-Budget speech yesterday, Finance Minister Robertson noted $4b worth of savings and reprioritisations that will allow the government to spend more on health, education and housing, while the weaker economy would see the fiscal accounts “take a hit”. He implied debt was on a higher trajectory, saying the government would be “making use of our balance sheet, particularly to fund long-term infrastructure”. Despite the sobering outlook and the contrast with Australia’s improvement in fiscal metrics as we noted earlier in the week, the bond tender was well supported, particularly for the ultra-long 51s, with the recent cheapening attracting investors. NZGB yields were down 3-5bps across the curve, with the larger move at the long end.
By contrast, 2 and 5 year swap rates were unchanged. Global forces saw the 2-year rate marked just below 5% in the morning, before a reversal prevailed, with a close of 5.05%. The 10-year swap rate fell 3bps to 4.21%.
In the day ahead, there’s some second-tier NZ economic data including the manufacturing PMI, net migration and the RBNZ’s survey of expectations. UK GDP data tonight should continue to show the economy barely growing, while US consumer sentiment and accompanying inflation expectations measures are released.
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