In the first full trading day after the weekend agreement on the debt ceiling, US Treasury yields are lower, although softer data have supported the move. US equities opened strong, but are now flat. Spillover from a weaker yuan and weaker commodity prices have dragged the NZD and AUD down.
With the US market open after the long weekend, the in-principle agreement over the weekend on the US debt ceiling has helped support the Treasuries market, dragging yields lower across the board. Supporting factors have been weaker indicators from the Conference Board on US consumer confidence and the labour market, as well as weaker CPI data out of the Euro area. US Treasury yields are currently down 9-11bps and falls in European yields are of similar order of magnitude.
The Conference Board measure of US consumer confidence fell to a six-month low of 102.3. This was a higher than expected but mainly because the prior figure was revised upwards. The share of consumers saying jobs were “plentiful” as well as the difference between “jobs plentiful” and “jobs hard-to-get” both fell to their lowest level in more than two years, consistent with other leading indicators showing a slowing jobs market.
It was a case of weaker than expected data all round for the Euro area. Economic confidence – a composite of consumer and business confidence – fell to 96.5. Other data showed further weakness in monetary and credit aggregates. And on the inflation front, Spain’s CPI inflation rate slowed much more than expected to 2.9% for the headline and 6.2% for the core. Belgium’s inflation rate (not surveyed) also slowed. These data suggest that figures for the rest of the Euro area due later this week might show the same trend. Overall, it looks like tighter monetary policy is doing the job to bring inflation down.
US equities opened on a strong note and it was widely reported that Nvidia hit the trillion dollar market cap threshold, as AI-related stocks continue to find favour. But the strength hasn’t been sustained and the S&P500 is currently flat near that crucial 4200 index level.
Commodity markets are generally weaker as nerves linger over the global economic outlook. Oil prices are down 4-5% with the contango in near-term futures suggesting ample supply conditions. WTI has gone sub-USD70 while Brent crude is around USD73.
Yesterday, China’s yuan continued to weaken, reaching fresh lows for the year, with USD/CNH hitting a high just below 7.11 and USD/CNY just below 7.10. Last week we noted the poor sentiment around China and that has continued this week, with a WSJ article headlined “China’s fading recovery reveals deeper economic struggles”, with the summary that ballooning debt, tepid consumption and worsening relations with the West to weigh on growth. The FT ran a similar anti-China growth story earlier this week.
The weaker yuan pulled the NZD down to a fresh low of 0.6025 and the AUD fell to just over 0.65. Against a backdrop of weaker commodity prices, both currencies are still struggling not far from those levels. NZD/AUD is slightly higher at 0.9280, as is typical when the mood is anti-China.
Other key majors have managed small to modest gains against the USD so other NZD crosses are all lower, with NZD/GBP on track to close below 0.49 for the first time in 15 months.
In Japan the BoJ, MoF and FSA convened in an unscheduled meeting to discuss the weak yen. The result was a comment to reporters that “it’s important that currency markets reflect fundamentals and move in a stable manner…excessive moves aren’t desirable…the government will take appropriate responses if necessary”. This came after USD/JPY broke up through 140 last week and was on the verge of 141. The threat of intervention saw the yen strengthen and this was aided overnight by lower US Treasury yields, with USD/JPY currently trading down to 139.80. The irony of course is that the BoJ’s monetary policy doesn’t reflect fundamentals, with inflation exploding well above target but the central bank insisting the move is temporary and continues to artificially suppress rates.
The domestic rates market saw lower yields, a reflection of global forces and some cross market outperformance ahead of month-end. The RBNZ’s signal last week that the OCR might have peaked continues to support market sentiment. NZGBs fell 6bps across the curve and with Australian 10-year bond futures down 6bps in yield terms overnight, the pressure will be for further falls in rates on the open. Swap yields fell 4-7bps.
Today the economic calendar kicks up a gear. RBA Governor Lowe will be in front of lawmakers ahead of the Australian monthly CPI release this afternoon, expected to show annual inflation tick higher to 6.4% y/y. China PMI data will likely continue to show divergent growth paths for the manufacturing and services sectors. Key releases tonight include German CPI, Canadian GDP and the US JOLTs report on the labour market.
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