Risk appetite is slightly weaker with unresolved debt ceiling negotiations still hogging the headlines. Global equity markets are modestly weaker, the US 10-year rate is slightly lower and the USD is broadly stronger. Domestic rates were notably higher yesterday, with some nerves ahead of today’s RBNZ MPS.
US debt ceiling negotiations continue to overhang the market, with so-called “productive” discussions between Biden and McCarthy, but a deal still being far from complete. One representative at yesterday’s meeting said the two sides were “not anywhere near close” to a deal. Until a deal is done, the market will remain on edge with the tail-risk of default still looming.
Weaker risk appetite has driven global equity markets lower, with the S&P500 currently down 1%, a failed sustained break of the key 4200 level, not helping sentiment. The US 10-year rate is currently down 2bps to 3.69% after trading as high as 3.76% overnight, a fresh two-month high. The curve has flattened, with the 2-year rate up 1bps to 4.32%.
PMI data were not market moving, continuing to paint a picture of a two-speed economy, with manufacturing indices falling further into contractionary territory and services indices showing further upward momentum for the Euro area and US. The US composite measure rose to its highest level in a year while the Euro area and UK composites dipped only slightly from annual highs. The data raise a question over whether monetary policy is tight enough to drive inflation in the services sector lower.
Separately, US new home sales rose to their highest level in over a year, supported by limited inventory in the existing homes market with homeowners “stuck” in their houses as moving would entail giving up their low locked-in 30-year mortgages. The data support improving US residential construction activity.
Oil prices are up over 1% after Saudi’s Energy Minister fired a warning shot against speculators in the market ahead of the next OPEC+ meeting to discussion production, saying “I keep advising them they will be ouching – they did ouch in April”, referring to the surprise recent cut to production. Brent crude is trading around USD77 per barrel, well up from the low 70s level of earlier in the month.
While higher oil prices have supported CAD, the NZD and AUD have underperformed with the backdrop of weaker risk appetite and lingering concerns about China’s economy that continues to weigh on the yuan, with USD/CNY sustaining a break above 7.05. The FT notes the “super-contango” feature of the copper market, with the $66 lower copper price for near-term delivery compared to three-months being the largest since 2006, reflecting concerns about weak China industrial production growth. The price of copper has fallen 11% in a month.
Both the NZD and AUD are down around 0.6% overnight to 0.6250 and just over 0.66 respectively. The USD is broadly stronger, with modest falls for the other key majors, but the NZD’s underperformance sees it lower on the key crosses, but steady on NZD/AUD around 0.9450.
The domestic rates market showed some nerves ahead of today’s RBNZ MPS. The 2-year swap rate showed a steady relentless lift throughout the day and ended up 11bps to 5.55%, surpassing the early-March high, taking it to levels not seen since 2008. This pushed rates higher across the curve and spilled over into NZGBs, the latter up 8-10bps.
Surveyed economists see more chance of a 25bps hike than 50bps and OIS market pricing is finely balanced between the two most obvious options. The market is positioned for the Bank to lift its rate projections, with a peak OCR priced at 5.9%, above the RBNZ’s projected 5.5% peak back in February. The RBNZ’s surprise 50bps hike in April caught the market offguard and added an element of uncertainty to the RBNZ’s reaction function. Adding in the lack of communication since the April MPR, it’s fair to say that no one has much conviction on what the Bank will actually deliver today.
Ahead of the Statement, NZ retail sales data are too dated to excite the market, but they’ll help inform how weak the economy was in Q1. The consensus is picking a soft 0.2% q/q increase for sales in inflation-adjusted terms. UK CPI inflation data tonight will show the beginning of a steep fall over coming months, with the headline rate expected to drop to 8.2% in April, but the core rate seen steady at 6.2%. The minutes of the May FOMC meeting will also be of some interest.
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4 Comments
It's a split decision and so if I had to choose what is going to happen I think the "path of least regret" aka the most defendable move is 25 points. I would prefer 50 to prevent the commercial lending rates dropping after the announcement of an OCR rise which would be counterproductive.
as much as oil has come of its recent lows --- its an even longer way back to it recent highs ! All the risk would seem to be on the upside and a move back to $90 or more.
Diesal in Tauranga this morning at $1.70 -- a far cry from the $2.90 i remember paying last year before the fuel tax subsidy -- Of course once that is removed -immediate 15 cent rise -- it can only add more fuel to inflation when in actual fact dropping fuel prices have been reducing the inflation rate!
:P I filled up (75L) at $3.70 for Auckland '98 - 20 minutes before they announced the subsidy. To say I was pissed would be an understatement lol!
Looks like OPEC are making squeaks about pushing prices up - I wonder how that will go when it looks like Russian supply is getting out dirt cheap via intermediaries?
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