The global bond market has been well supported after a run of weaker economic data while global equity markets are weaker. CNY, NZD and AUD all hit fresh lows for the year and commodity prices are weaker after softer than expected China PMI data. After trading sub-0.60, the NZD has recovered to just over that mark.
There has been plenty of economic news to digest and the market has been more attune to the downside than upside misses. Yesterday, China PMI data were slightly weaker than expected, with manufacturing sliding further into contractionary territory and non-manufacturing showing a further modest fall after its post-COVID surge. Despite the composite PMI remaining above it 5-year average, the data miss added to the downbeat sentiment around China that has pervaded the market recently, driving the yuan weaker, and spilling over into the NZD and AUD, all these currencies reaching fresh lows for the year.
The data also weighed on commodity prices, with many showing further weakness. Copper prices are down 5½% for the second consecutive month. Oil prices are down another 1%, taking Brent crude below USD73 and down over 8% for the month.
German CPI inflation fell from 7.6% y/y to 6.3% in May, 0.4 percentage points less than expected, the same scale of downside miss as Spanish and French CPI data. These data suggest that Euro area CPI data due tonight will also show some downside relative to expectations at the beginning of the week. The data helped pushed European yields lower, with the market no longer pricing in two full ECB rate hikes ahead and Germany’s 2 and 10-year rates both down 6bps on the day, the latter now down 26bps for the week so far.
US job openings unexpectedly rose to a three-month high of 10.1m in April from an upwardly revised 9.7m in March. This saw the ratio of job openings to unemployed rise to 1.8. The positive turnaround in these data defy most other labour market measures that show a softening in conditions. Indeed, the quits rate fell to a 14-month low of 2.4. Less workers voluntarily leaving their job suggests less job security. The Chicago PMI plunged over 8pts to 40.4, supporting other regional indicators pointing to further contraction in the manufacturing sector in May.
The message of FOMC members continues to be split into two camps, those suggesting more work needing to be done and those advocating a pause. Fed Governor Jefferson looked to favour a pause in the tightening cycle saying “skipping a rate hike at a coming meeting would allow the Committee to see more data before making decisions about the extent of additional policy firming”. Philadelphia Fed President Harker also backed skipping a rate rise in June. Both of those Fed speakers are voting members. By contrast, non-voter Cleveland Fed President Mester said “I don’t really see a compelling reason to pause”, noting “some of that really embedded, stubborn inflationary pressure”.
The US data caused some volatility in Treasury yields around the time of their release, but the market has reacted more to the downside misses and Jefferson’s comments. The 2-year year rate is currently down 6bps to 4.39% and the 10-year rate is down 5bps to 3.64%. The OIS market gave considerable weight to Governor Jefferson’s message, with pricing for the June meeting falling 7bps after his “pause” message hit the headlines. The market now prices 8-9bps worth of hikes for the June meeting, down from the 15-16bps level earlier in the session.
Canadian GDP rose an annualised 3.1% in Q1 and preliminary data showed a 0.2% m/m lift in April. The recent run of positive Canadian activity data raise the risk that the Bank of Canada might restart its tightening cycle after its recent pause. The market sees a 30% chance of a 25bps hike at its meeting next week and with a full hike priced by the September meeting.
In currency markets, the NZD has regained some poise, albeit not much, trading just over 0.60 after hitting a low of 0.5985 overnight. The AUD fell to just below 0.6460 and is back just under 0.65. All this after the yuan weakened, with USD/CNH trading over 7.13 and back down to 7.11. NZD/AUD is slightly weaker at 0.9250. Released at the same time as China PMI data, Australian CPI inflation lifted more than expected to 6.8% y/y, keeping alive the prospect of further RBA hikes.
EUR has also found the going tough, with its strong export exposure to China and weaker CPI data. EUR is down to 1.0675 and NZD/EUR has managed to be net flat for the day at 0.5630. GBP and JPY have been on the positive side of the ledger, the latter reflecting the lower rates backdrop. NZD crosses against these are down in the order of 0.7-0.9% for the day.
US equities are ending the month on a softer note. The S&P500 failed to sustainably break above 4200 yet again and is currently down 0.4%, although on track to finish the month with a small gain. The lack of breadth in the market is evident by the equally weighted S&P500 being currently down around 3% for the month. The Euro Stoxx 600 index fell by 1.1%, taking its fall for the month to 3.2%.
The domestic rates market showed some cross-market underperformance yesterday, with milder falls in rates than seen elsewhere. NZGBs fell 1-3bps. The 2-year swap rate was flat at 5.20% while the 10-year rate fell 4bps to 4.33%. The ANZ business outlook survey showed another nudge higher in the own-activity indicator, but from a low base, while inflation indicators nudged lower from a high base – nothing there to change the narrative of a stagflationary environment in NZ, even if indicators are moving in the right direction.
Key releases in the day ahead include the Euro area CPI and US ISM manufacturing index. Second-tier releases include US ADP employment and jobless claims.
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