Higher Caixin China PMI, lower Euro area inflation, soft ISM manufacturing report with lower prices paid, strong ADP employment with lower wage inflation, all deliver positive risk sentiment after US gets debt deal done

The new month has begun on a positive note, with the US House passing the debt ceiling bill and some market-friendly data supporting a lift in global equity markets and lower global rates. With the lift in risk sentiment, the USD is broadly weaker and the commodity currencies have outperformed, the NZD, AUD and CAD all up in the order of 1% overnight.

Yesterday afternoon, the House passed the bill suspending the US debt ceiling in a 314-117 vote, which now passes over to the Senate to vote on.  It looks like a US debt default will be avoided in the nick of time. The Senate will stay in session until the bill is approved, which should be ahead of the weekend. This news was soon followed by a rare upside surprise in a China data release, with the Caixin manufacturing PMI rising back above the 50 mark to 50.9.

Market-friendly news has continued overnight. The US ISM manufacturing index slipped to 46.9, suggesting the sector contracting for a seventh consecutive month in May. There was also a weak underbelly, with new orders dropping more than 3pts to 42.6 and prices paid slumping 9pts to 44.2.

ADP employment showed a strong 278k gain in private payrolls in May, led by the leisure/hospitality sector.  But the indicator has been an unreliable guide to non-farm payrolls, where expectations sit for a 195k increase. The wages information was more market-friendly, with the commentary noting “pay growth is slowing substantially”. Pay rises for those changing jobs fell a full percentage point to 12.1% and a year ago this was running at over 16%, while job stayers saw a smaller 6.5% pay increase. In a separate report, unit labour cost inflation was revised down over 2 percentage points to an annualised 4.2% in Q1, supported by an upward revision to productivity.

As forewarned by country-level data earlier in the week, Euro area CPI inflation fell to 6.1% y/y in May, from 7.0%, and the core rate fell to 5.3%. The data suggest that inflation is heading in the right direction but ECB President Lagarde played down the figures in a speech, repeating the line that “we still have ground to cover to bring interest rates to sufficiently restrictive levels”.

The data flow has seen the market pare back the chance of another Fed rate rise, supporting that theme after FOMC voters Fed Governor Jefferson and Philadelphia Fed President Harker were sent out the previous day to broadcast a “Fed pause” message. This was followed by the WSJ’s Timiraos outlining the Fed’s strategy of pausing in June but keeping alive the chance of a possible further hike.

Pricing for the Fed’s June meeting is down to +7bps, from the +17bps level ahead of the Jefferson speech. The 2-year Treasury yield is down 7bps, following the 5bps fall in the previous session, while the 10year rate is down 4bps to 3.60%. European rates are also lower across the board, with Germany’s 10-year rate down another 3bps.

Positive risk sentiment has driven the USD down about 0.7% for the day. Commodity currencies lead the charge, with the NZD up about 1% overnight to 0.6070, a solid recovery after re-visiting the sub-0.60 level late yesterday.  The AUD has performed slightly better, up to 0.6575 and seeing NZD/AUD push down to 0.9225. CAD is also about 1% stronger. Oil prices have recovered 2-3% on the higher risk appetite theme, ignoring a 4m barrel lift in US stockpiles last week.  EUR and GBP have made solid gains of 0.8% overnight while the yen has somewhat lagged the move.

The S&P500 has regained the 4200 handle and is currently up around 1%, with tech stocks outperforming. The Euro Stoxx 600 index rose 0.8%.

NZGBs slightly underperformed yesterday, showing about a 3bps lift in yields for most lines, although strong demand for the 2051 bonds at the tender saw that maturity unchanged on the day. Swap rates were barely changed, with 2-year swap up a tick to 5.21% and the 10-year rate unchanged at 4.33%. Australia’s 10-year bond future is down 5bps in yield terms overnight, which will help push NZ rates down on the open.

In the day ahead, NZ building work and terms of trade data will be released for Q1. But the key release will be the US employment report, expected to show a moderation non-farm payrolls growth to 195k for May, the unemployment rate ticking higher to 3.5% and modest average hourly earnings growth of 0.3% m/m.