It has been a quiet overnight session, with small market movements. US equities are flat and US Treasury yields are up slightly. The AUD has sustained the gain seen after the RBA hiked rates again and with the NZD largely tracking sideways, NZD/AUD probed a 4-month low just below 0.91.
There has been little news overnight to drive markets. The S&P500 is currently flat but, of note, there has been a recent broadening of performance, with the small cap Russell 2000 index up 2½%, following its outperformance last week where it gained 3.3%. Banks are also performing strongly, with the KBW banking index up over 2½% and the regional banking index up 5%, extending the bounce-back over the past month after the savage blow dealt to the banking sector from early-March to mid-May.
The US 10-year rate has traded a 3.65-3.73% range and currently sits up slightly for the day at 3.70%. The 2-year rate is up 6bps to 4.52%, ahead of some chunky T-bill auctions this week as the US Treasury looks to replenish its coffers, now that the debt ceiling has been suspended.
In second-tier economic news, an ECB monthly survey showed a marked fall in consumer inflation expectations, with the year-ahead rate down from 5% to 4.1% and the three-years ahead rate down from 2.9% to 2.5%. German factory orders fell 0.4% m/m in Apr following the 10.9% plunge in March, against expectations for a near-3% bounce-back. These weaker data prints have helped contain European rates, with little movement at the 10-year maturity and Germany’s 2-year rate down 5bps.
They have also been a drag on EUR performance, although most currency movements have been modest. EUR is down 0.2% on the day to 1.0695. The yuan is weaker after reports that last week China asked the biggest banks to cut deposit rates. There are also reports that the PBoC might be ready to cut the reserve requirement ratio, which would unleash further liquidity into the market. Such policies signal some tolerance to a weaker yuan and USD/CNH rose to a fresh year-to-date high above 7.14 overnight before settling around 7.13.
The weaker yuan has held back performance of the NZD and AUD overnight. The NZD touched 0.61 but is back trading around 0.6070, so a net flat performance for the day overall. The AUD has sustained the sharp gain seen after the RBA rate hike yesterday (see below) and currently sits at 0.6670. NZD/AUD has fallen to a four-month low, trading just below 0.91 overnight and sitting close to that level as we go to print. Our bearish report on NZD/AUD published last week has turned out to be well-timed. We are targeting a move towards 0.88 given the poor macro forces for the cross and expectations of further NZ-Australian interest rate convergence.
The RBA’s 25bps hike in its cash rate to 4.1% seemed to catch the market off-guard even though most saw the move as a close call, following last week’s CPI surprise and the large minimum 5.75% wage increase set for award wage earners. The RBA noted that the rate hike was a response to the increased upside risks to the inflation outlook and it maintained a bias to tighten further. The 3-year bond future has sustained a 10bps increase in yield terms since the announcement, while the 10-year rate is up 4bps.
The domestic rates market played catch up to the global moves following the King’s Birthday holiday. Swap rates were up 4-6bps while NZGBs were up 4-9bps, with light volumes ahead of the RBA’s announcement, which came after the NZ market close. The lift in Australian rates noted above sets the scene for higher NZ rates on the open.
The overnight GDT dairy auction showed a 0.9% fall in the price index, weighed down by a 3% fall in whole milk powder, while skim milk powder was flat. The fats showed positive gains, including a 7.4% lift in cheddar.
In the day ahead, Governor Lowe will be giving a speech this morning, which will likely flesh out more detail on yesterday’s rate hike, and Australian Q4 GDP follows, with the consensus expecting a 0.3% q/q increase. Elsewhere, other highlights include China trade data and the Bank of Canada’s policy decision tonight. While most expect an on-hold decision, the market prices some chance of another 25bps hike following its recent pause decisions.
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