US equities have been propelled higher after the strong result from Nvidia. Despite some mixed economic data, global rates are higher as the market prices in further hikes from the Fed, ECB and BoE. The USD continues to be well supported, dragging the NZD and AUD down to fresh lows for the year, while the yen continues to suffer against the backdrop of higher global rates.
US debt ceiling negotiations continue to hog the headlines, with Biden and McCarthy continuing to say that something will be done in time but no hard evidence of that yet. The mood music is slightly more positive with talk of the gap closing between the two sides.
Meanwhile, yesterday Fitch Ratings moved the US to “rating watch negative”, the forerunner to a possible downgrade to its current AAA sovereign rating. The agency said “we believe risks have risen that the debt limit will not be raised or suspended before the X-date and consequently that the government could begin to miss payments on some of its obligations”. Separately, a Moody’s Investors Service spokesman said that a 15-June coupon payment for Treasuries will be critical – if it was missed, that’s a default and Moody’s would downgrade the rating one notch from AAA to AA1, and that would be permanent unless there was significant reform of the debt-limit rule.
Data releases have been mixed. US initial jobless claims were revised lower for the past three months, after Massachusetts discovered fraud, which meant 171,000 total fewer applications than previously reported. The new figures show claims rose 4k last week to 229k. The trend has stabilised over the past couple of months after picking up earlier in the year.
US GDP was revised up slightly in Q1 to an annualised 1.3%. The release contained the first estimate of Gross Domestic Income, which fell for a second consecutive quarter, at a minus 2.3% pace in Q1 after minus 3.3% in Q4. The average of GDP and GDI would suggest the US economy entered recession at the end of last year, consistent with other indicators suggesting recession-like conditions. The same release showed a one-tenth upward revision to the core PCE deflator, running at a 5.0% annual rate in Q1.
Revised data showed that Germany has in fact been in recession, with GDP now down 0.3% q/q in Q1 after contracting 0.5% in Q4. That fact hasn’t stopped ECB members saying that more work needs to be done to bring inflation under control and the market prices at least two more hikes and a chance of a third over coming meetings.
The market has viewed the data in a more positive than negative light, unperturbed by the recessionary forces. US Treasury yields are higher across the curve. The 2-year rate is up for the tenth consecutive trading session, adding 13bps to 4.50%. The market is pricing in another rate hike over the next two meetings, currently with 25bps spread between them. The 10-year rate is up 7bps to 3.81%.
European rates are also higher, with the market focused on the more work needed to be done by central banks than the weak economic backdrop. European 10-year rates are up around 5bps, while UK rates have added to the substantial gains after the shocking CPI report the previous day, with 2 and 10-year gilts up 16-17bps and the market now pricing in another substantial 110bps worth of rates hikes from the BoE. MPC member Haskel supported further tightening saying “as difficult as the economy’s current conditions are, embedded inflation would be worse…further increases in Bank Rate cannot be ruled out.
US equities are higher, undeterred by higher rates, buoyed by the strong result from Nvidia that has pushed its share price up 25%, encouraging investors to continue to pile into stocks exposed to the AI theme. The S&P500 is currently up 0.8% while the Nasdaq is up 1½%.
A couple of days after Saudi’s energy minister warned speculators in the oil market, prices are down 3-3½%, with Russia saying that OPEC+ is unlikely to take any new steps at the meeting ahead. Traders remain concerned about global demand ahead and Brent crude is back around USD76 per barrel.
In currency markets the positive streak for the USD has entered its fourth day. While EUR, GBP and CAD show only modest falls for the day, the yen is underperforming against the backdrop of higher global rates and USD/JPY is just shy of 140. The NZD and AUD have traded at fresh lows for the year of 0.6044 and 0.6499 respectively. The NZD is lower on all the key crosses, extending weakness following the surprisingly dovish outlook from the RBNZ earlier in the week. NZD/AUD is around 0.93. While the NZD is down 3.6% for the week so far, the fact that the AUD is down a substantial 2.1% suggests that the move hasn’t all been about the RBNZ and weaker global forces have played a role, mainly concerns about the global growth outlook and negative sentiment on China.
The NZ rates market is still settling post-RBNZ MPS, but global forces were largely in charge yesterday, with NZGB and swap rates up in the order of 3-4bps across both curves. The government bond tender went well, with bid-cover ratios of 2.5-3.5x across the lines and issuance at small premiums to prevailing mids.
On the calendar today, NZ consumer confidence, Australian retail sales and Tokyo CPI figures are out during NZ trading hours. The key releases tonight are the US core PCE deflator, expected to show annual inflation steady at 4.6%, personal spending data and durable goods orders. There will also be some interest in whether the final reading of long-term inflation expectations from the University of Michigan survey is revised down or not, after the initial estimate shocked the market with its elevated reading of 3.2%.
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