Negative market sentiment prevails over China; weaker yuan drags NZD and AUD lower; NZD goes sub-62 USc. European rates higher, more so for UK than Euro area; NZ-UK 10 year rate spread goes negative

It has been a quiet start to the week with the US on holiday. Risk appetite is softer, with plenty of headlines on China’s economic headwinds. A weaker yuan has dragged down the NZD to 0.62 and the AUD to 0.6850. European yields are higher and the 10-year Treasury future is up 5bps in yield terms.

US cash markets are closed for a public holiday. US equity futures closed down 0.1-0.2% in Europe while the Euro Stoxx 600 index fell by 1%, led by the Materials sector as negative headlines on China have prevailed.  Goldman Sachs joined the plethora of other banks over the past week who have cut their China GDP forecasts to 5.5% or lower for 2023, following the string of negative economic surprises.

Yesterday the market was disappointed on the lack of any announcement on a Chinese stimulus package following a State Council meeting. The yuan has been one of the weakest currencies on the day, with USD/CNH and USD/CNY both up 0.5% to be back over 7.16, dragging the NZD and AUD lower.

The US and China are back talking at a high level as US Secretary of State Blinken met President Xi in Beijing, the first visit by a US cabinet member in four years. Other than agreement to continue high-level talks in the future, there was nothing concrete to come out of the meeting. While some sort of relationship has resumed, the mood music post-meeting remained prickly, with China’s foreign ministry saying the meeting was purely a matter of courtesy and blamed the US for the frictions.

A weaker NZD through the local trading session has been followed by a bit more weakness overnight. The NZD has traded below 0.62 and currently sits close to that mark. The AUD hasn’t fallen any further overnight and is currently just under 0.6850.  NZD/AUD is around 0.9050. Other major currencies haven’t seen the same drag from a weaker yuan, but the USD is broadly stronger. Key NZD crosses are all down modestly on the day. Higher global rates have limited yen weakness, with USD/JPY near 142 and NZD/JPY off its 8-year high traded at end of last week, dropping to 88.0.

Comments from ECB Governing Council members have shown some disparity between the hawks and the doves. With another 25bps hike already baked in for next month, focus is on what happens at the September meeting still three months away. One of the more respected members by the market, Schnabel, remains hawkish.  She noted that inflation risks were tilted to the upside, there is a limit to how long inflation can stay above 2% and that the central bank needed to err on the side of doing too much. At the other end of the spectrum, Chief Economist Lane noted that a lot of hiking had already been done, inflation would come down fairly quickly and he suggested that it was too early to make a call for what will happen in September. The Slovak and Lithuanian Governors also conveyed a message of data-dependency and suggested no rush to assess what might happen in September.

The market has paid more attention to Schnabel than the others, with rates higher across the board. Germany 2 and 10-year rates are up 4bps.  UK rates continue their relentless rise led by the short end, with the 2-year gilt up 14bps and the 10-year rate up 8bps. The NZ-UK 10-year spread has gone negative for the first time since the September/October 2022 UK market turmoil when Liz Truss was PM. Later this week, the consensus sees another strong UK CPI print and a hawkish 25bps hike from the BoE.

Higher European and UK yields have been a drag on US Treasuries, with the 10-year future pointing to a 5bps lift in yield. The NAHB homebuilders’ sentiment index rose for a sixth successive month to an 11-month high of 55. The lack of existing homes on the market, with mortgage holders reluctant to move as they would have to give up their low locked-in 30-year mortgages, continues to push buyers into the new-build market.

Yesterday, domestic rates pushed lower, with NZGB’s outperforming swaps and the Australian market, with yields down 7-9bps across the curve. This sees the NZ-Australian 10-year spread down to a four-month low of 45bps, well down from the mid-March peak of 100bps. Diverging RBNZ and RBA rate paths from here can explain the move, as the RBA plays catch-up to the hikes already passed by the RBNZ. The swaps curve showed a modest flattening bias, with the 2-year rate down just 1bp to 5.34% and the 10-year rate down 5bps to 4.44%.

On the event calendar today, there is nothing top-tier of note. NZ consumer confidence and US housing starts and permits are the economic indicators. China is expected to see further rate cuts and minutes of the RBA’s early June meeting are released. Fed speakers Bullard and Williams will be on the wires.