US CPI figures broadly as expected; annual headline and core figures both clearly heading lower. Paves the way for Fed to skip hike tomorrow, but core not weak enough to quash chance of a future hike. Treasury yields higher across the curve

There has been plenty of newsflow to digest, with a surprise Chinese rate cut ahead of soft credit data, a very strong UK labour market report that drove UK rates much higher, and an in-line US CPI report. The net result has been higher global rates, further gains in equity markets, a broadly weaker USD but an even weaker yen. The NZD trades this morning at 0.6140.

US CPI data were broadly in line with market expectations, with lower gasoline prices driving the headline rate down to 0.1% m/m and 4.0% y/y, the lowest annual inflation since March 2021. The CPI excluding food and energy rose 0.4% m/m and 5.3% y/y. Another key core measure which looks at services ex housing and energy services rose by just 0.2% m/m and 4.6% y/y.  Thus, the evidence continues to mount that inflation pressures are receding and leading indicators point to further downside pressure ahead.

The data supported the view that the Fed will skip tightening at tomorrow’s FOMC meeting but the core inflation measures weren’t weak enough to extinguish the chance of a further possible hike. The debate will shift to whether or not the Fed will choose to tighten again in July. Following the key CPI report overnight, the OIS market prices just 3bps of tightening for tomorrow (down from 6bps) and a cumulative 17bps by July (down from 22bps).

US Treasuries were choppy around the release, with the initial fall in rates giving way to higher rates after the data were fully digested. Higher UK rates (see below) haven’t helped the mood. After falling to as low as 3.68% the 10-year Treasury yield has driven higher to trade at 3.83%, up 10bps for the day. The 2-year rate is up 11bps to 4.69%.

UK labour market data were much stronger than expected, with the unemployment rate for the three months to April unexpectedly dropping to 3.8%, the big decline in April payrolls revised away and preliminary May data showing a further lift, and weekly earnings ex bonuses accelerating to an uncomfortably high 7.2% y/y. These data saw the market ramp up BoE rate hike expectations with an incredible further 137bps worth of hikes now priced through to February next year, adding another full hike to the rate path.  This would take the policy rate to at least 5.75%, with some chance that it could crack 6%.  The move drove the 2-year gilt up 26bps up on the day, with a more sedate 10bps lift in the 10-year rate. BoE Governor Bailey spoke to lawmakers after the release and noted the very tight labour market.  He reiterated he thought inflation would come down “but it’s taking a lot longer than expected”.

The yuan has been choppy after plenty of China-related news. The PBOC cut 10bps off the 7-day reverse repo rate to 1.90%, its key policy rate, the third cut this easing cycle. This was a signal of some concern around China’s recovery and other tools are likely to be used to support the economy. The policy move triggered further yuan weakness, with USD/CNH breaking up through 7.17, before reports surfaced that China was considering a broad stimulus package. This gave some support to the yuan before credit data came in softer than expected, with annual declines in aggregate financing and new loans. After falling back below 7.15, USD/CNH is currently trading up around 7.1775.

The USD is broadly weaker on the day, but with the higher global rates backdrop driving the yen down, with USD/JPY up through 140. GBP has been the strongest of the majors, supported by higher rates, and back up to 1.26. The weaker yuan yesterday drove the NZD below 0.6110, but the broadly weaker USD saw it push to a high just under 0.6180 overnight before settling around 0.6140. It has slightly outperformed the AUD overnight, with the AUD around 0.6760 and NZD/AUD trading near its high for the day around 0.9085. NZD/GBP is down to 0.4875, while the weaker yen sees NZD/JPY back up through 86. NZD/EUR is slightly higher, around 0.57.

Higher global rates have been no barrier to further US equity market performance, with the S&P500 currently up 0.4% and all but one sectors in positive territory.

Oil prices have recovered most of yesterday’s losses, supported by easier policy in China and talk of further stimulus measures giving some hope of a stronger demand outlook for oil. Brent crude us back trading with a USD74 handle.

The domestic rates market showed small falls across the curve, with swaps down 1-3bps and NZGBs down 1-2bps. The Australian 10-year bond future is up 8bps in yield terms overnight which will set the tone for early trading today. There was no reaction to net migration data showing that the net inflow slowed considerably in April to just under 6k for the month compared to over 13k in March. It’s too early to jump to conclusions, but the data play to the view that the surge in inflow over February/March, might have been inflated by seasonal factors and pent-up demand.

In the day ahead, the consensus sees NZ’s annual current account deficit cracking 9% of GDP, a bad look particularly when seen against the government’s projected cash deficit of 6.5% of GDP. It shows both a government and a country spending beyond its means. Tonight sees the release of monthly UK activity data, euro area industrial production and US PPI data. But the headline act will be tomorrow’s FOMC meeting announcement at 6am NZ time. The consensus sees rates on hold but the median “dot” showing an extra 25bps later in the year. The tone of Chair Powell’s following press conference should be the key driver of the market’s reaction.