There has been a lot of economic data released but market movements have been well contained. The USD is broadly stronger, albeit with only a small gain. Weaker China data saw the yuan weaken, with more spillover impact for the AUD than NZD, with higher NZ rates softening the blow as well. US Treasury yields have pushed higher, with a mega corporate bond deal by Pfizer weighing on the market.
Treasury yields are higher across the curve. Bond supply is weighing on the market with Pfizer doing an eight-part $31b deal spanning 2-years to 40-years, one of the largest corporate bond deals on record. There has also been a steady stream of other corporate deals of late, with chatter that deals being done ahead of possible market volatility as US debt ceiling negotiations get messy over coming weeks. US 2 and 10-year rates are up around 4-6bps for the day, to 4.07% and 3.55% respectively.
US economic data released haven’t supported the Treasury market, with more upside than downside surprises for the activity indicators published. The US retail sales report was mixed, with a smaller than expected 0.4% m/m recovery in April for the headline and an upside surprise of 0.6% m/m for the core measure (ex-autos and gas). Stepping back from the recent monthly noise, retail spending growth remains on a downward trajectory. Industrial production and the NAHB housing market index both positively surprised, the former driven by a surge in vehicles and the latter driven by a lack of sales for existing homes – homeowners are reluctant to move out of existing homes and lose the benefit of their locked-in low 30-year mortgages, which is pushing buyers into the new home market.
US equities are mixed, with falls for the Dow Jones and S&P500 but with the Nasdaq index slightly higher. Home Depot expected annual sales to decline for the first time in over a decade, as consumer spending tightens and demand for home renovation projects continues to soften.
In other economic news overnight, UK labour market data were on the softer side of expectations, with average weekly earnings ex bonuses ticking higher to 6.7% y/y, the unemployment rate ticking up to 3.9% and payrolled employees falling 136k in April, the first drop since February 2021 – some mixed figures that only prompted a modest market reaction. Canada’s CPI unexpectedly ticked up to 4.4% yoy in April but the average of the two key core measures were in line, nudging down from 4.5% to 4.2%.
Yesterday, the key monthly China activity indicators – retail sales, industrial production and investment – all surprised to the downside. This follows weak China data last week on imports, credit and inflation, playing to the view of sluggish underlying growth and further possible policy stimulus ahead.
The softer Chinese data have weighed on the yuan, pushing USD/CNH to just under 7 and USD/CNY to 6.977. This spilled over into a weaker AUD, down 0.6% on the day to 0.6660. The NZD has been less impacted and is down only slightly from this time yesterday to 0.6230. NZD/AUD has pushed up to 0.9350. Higher NZ rates after Westpac’s changed OCR call (see below), is possibly another factor for the higher cross. The USD is broadly stronger, although not significantly so, with only a small tick down for EUR and slightly larger falls for GBP and the yen.
The overnight GDT dairy auction showed a 0.9% fall in pricing, following the roughly 2-3% gains over the past two auctions. Whole milk powder rose 0.3% while skim milk powder fell 1.6%.
Domestic rates were higher and curves flatter from the open, following Westpac’s revised call that the OCR would peak at 6.0%. This was an out-of-consensus call and the market isn’t buying into it at this stage, with the peak OCR priced shifting from 5.53% in July to 5.60% in August, well shy of the 6% mark. The 2-year swap rate rose 9bps to 5.04% against a 5bps lift in the 10-year rate to 4.22, with some mild upside from global forces an additional factor. Short-dated NZGBs were up 10-11bps, against an 8bps lift in the 10-year rate and a 5-6bps lift the ultra-long bonds – some evident bond-swap cheapening ahead of tomorrow’s Budget, which is expected to show a deterioration in fiscal metrics compared to the last fiscal update and odds favouring a higher bond programme.
In the day ahead, Japan Q1 GDP, Australian Q1 wages and US housing starts and permits are released. Stronger than expected wages data would keep the pressure on the RBA to continue hiking rates.
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