Risk sentiment higher on less fear of an imminent US debt default and less concern on US banking sector. US equities up over 1%, US Treasury rates higher for a fourth consecutive day. NZ rates higher on revised OCR calls

Risk sentiment has improved with some attributing this to reduced fear of a pending US government debt default following comments from the key players. US equities are stronger, US Treasury yields are higher and commodity currencies have outperformed. The NZD has broken up through 0.6250. NZ rates continued to push higher, fuelled by upwardly revised OCR calls.

The mood music around US det ceiling negotiations has seemingly improved, with President Biden saying he was “confident” on an agreement and that America will not default. House Speaker McCarthy also said he remained hopeful a deal could be reached. Further talks will involve a narrower group of negotiators in hopes of reaching a deal. Meanwhile, Treasury’s cash balance fell over $50b between Friday and Monday to just $87b, after larger than expected outflows, increasing the chance of the “X-date” being in early June.  Treasury has almost run through all of its authorised extraordinary measures to keep paying the bills.

US equities are stronger, with the S&P500 up over 1%. As well as optimism on the debt ceiling ultimately being raised, there is also less concern on the banking sector after regional bank Western Alliance Bancorp said that its deposits had grown another $200m in a few days, following the $1.8b increase from the end of the quarter reported over a week ago. The KBW banking index is up 5% and the regional banking index up 7%. Following weaker guidance by Home Depot yesterday, Target maintained its annual outlook, even in the face of softening sales trends, as consumers switch from discretionary spending to essential items.

The US 10-year rate is up for the fourth consecutive trading session, currently 5bps higher for the day to 3.58%. There has been further curve flattening, with the 2-year rate up 8bps to 4.16%.

Economic data released haven’t been market moving. US housing starts and building consents were broadly in line with expectations, providing further evidence the downturn in housing construction is likely over. Japan GDP rose 0.4% q/q in Q1, ahead of market expectations. Australian wages rose slightly less than expected at 0.8% q/q in Q1, but there were positive revisions and annual wage inflation reached a fresh decade-high of 3.7% y/y.

In currency markets, higher risk sentiment has supported commodity currencies, with the NZD, AUD and CAD performing the best overnight, but with only small gains. The NZD is currently 0.6260 and the AUD is at 0.6660. NZD/AUD headed above 0.94 yesterday with another domestic bank revising up its OCR call (see below) and the cross has since settled just below that mark. It was also a case of the AUD being more affected than the NZD by the weaker yuan, as USD/CNY broke up through 7 for the first time this year, some afterglow from weaker China data earlier in the week.

NZD crosses are all higher, less so against GBP than EUR, with the pound finding support after a speech from BoE Governor Bailey which highlighted the bias to tighten further. He said that MPC “continues to judge that the risks to inflation are skewed significantly to the upside, primarily reflecting the possibility of more persistence in domestic wage and price setting”. The backdrop of higher Treasury yields sees the yen as the worst performer, seeing NZD/JPY up over 1% to 86.

Yesterday, domestic rates faced further upside pressure in the face of global forces and revised OCR calls, this time ANZ reverting back to a previous forecast of seeing a 5.75% peak OCR in July, a day after Westpac revised up to a 6.0% peak in August. OIS pricing pushed higher, with a peak of 5.69% priced for August, up 9bps on the day. This fed through into the swaps market and helped flatten the curve, with the 2-year swap rate closing up 8bps to 5.12% and the 10-year rate up just 1bp to 4.24%. NZGBs underperformed again, ahead of today’s Budget, with rates up 7-8bps out to 10-years maturity and the ultra-longs up 5-6bps.

The NZ Budget will be out at 2pm this afternoon.  Deteriorating fiscal accounts amidst a weak economy will necessitate a tight election-year Budget and the pressure on the bond programme will be to the upside. Australian labour market data will remain strong on consensus estimates, with the unemployment rate expected to remain unchanged at a historically low 3.5%.  Tonight sees US initial jobless claims, the Philly Fed business survey and existing home sales.