US initial jobless claims show a solid increase to 261,000, further confirmation of an easing in labour market pressures. This drove US Treasury yields and USD lower. Support for bonds also came from lower oil prices on reports of US-Iran nuclear talks

Bad news for the US economy in the form of higher jobless claims spells good news for bonds and equities, with the data supporting US equities, a modest fall in Treasury yields and extending prevailing weakness in the USD.  The NZD is stronger, meeting some resistance just under 0.61.

US initial jobless claims rose 28k last week to 261k, their highest level since October 2021. The weekly change was the largest in two years. While the impact of the Memorial Day public holiday could have distorted the figure, leading indicators have suggested for some time that jobless claims ought to be increasing quite rapidly soon, to well north of 300k. The data play to the view of an easing in labour market pressures, as last week’s data showing a chunky 0.3% lift in the unemployment rate and lower wage inflation showed.

The data thereby support the view that the Fed need not necessarily tighten monetary policy further, although market pricing for the near-term Fed Funds rate didn’t change much with 21bps still priced over the June/July meetings. There was more impact on the rates market further along the curve, with the 2-year Treasury yield down 4bps on the day to 4.52% and the 10-year rate down 8bps to 3.72%, unwinding over half of yesterday’s significant move higher.

The bond market has been supported by a fall in oil prices, with media reports of the US and Iran making progress in on nuclear talks. If that is true, then Iran could add 1m barrels of oil a day to global supply within months of any deal. WTI oil fell to as low as USD69 and change and currently trades just over USD71, while Brent crude is around USD76, both down 1½-2% for the day.

The jobless claims data have supported a modest lift in US equities while the USD was heading lower before the data and there was a further extension of that move. Dollar indices are down 0.6-0.7% for the day. The NZD has trended higher overnight, meeting some resistance just under 0.61. The AUD has pushed back over the 0.67 mark and NZD/AUD has been hovering around 0.9075. With most currencies stronger against the USD, key NZD crosses are little changed. CAD has been the exception, being closely pinned to the USD and seeing NZD/CAD recover to 0.8140.

In other news, albeit not market moving, Euro area GDP data were revised down, with a 0.1% contraction for Q1 following the 0.1% contraction in Q4, putting the region in technical recession. The move followed the recent downward revision to German data which gave the same recession signal over winter. Revisions to Japan were in the opposite direction, with Q1 GDP revised higher to 0.7% q/q, making Japan one of the strongest economies for Q1 in the G10, second to Canada. Of course, Japan’s monetary policy has been on a divergent path to the rest of the G10, with its ultra-easy policy stance against much tighter monetary policy elsewhere. With Japan’s core inflation fast catching up to the rest of the G10, the BoJ’s current policy settings look increasingly unsustainable.

Yesterday, NZ business indicators released for Q1 weren’t flash and they allowed us to firm up our GDP estimate to a 0.2% q/q decline, following on from the 0.6% contraction in Q4. Our estimate is weaker than the RBNZ’s +0.3% pick. The standard forecasting error means that either of those two outcomes are both plausible, but clearly a negative outturn would get media writing about the economic recession beginning late last year.

Recessionary conditions are feeding into deteriorating fiscal metrics, including an annual fall in total tax revenue, something usually only seen when tax rates are cut or in economic recessions. Despite fresh fiscal projections at last month’s Budget, the deficit is already running $1.3b higher than projected.

NZ’s rising twin deficits position didn’t perturb investors, with another solid government bond tender and the highest bid/cover for the longest 2037 bonds on offer – the good result owing in part to the cheapening of bonds ahead of the tender. Global forces sent NZ rates higher from the open and NZGB rates closed 10-11bps higher.  Still, this was a much better cross market performance compared to Australia and against swaps, which were 11-14bps higher across the curve.

In the day ahead, China inflation data and Canada’s employment report are released.