Fed, ECB, BoE heads reiterate hawkish views. BoJ reiterates dovish stance. US Treasury yields down 4-5bps regardless. NZ swap rates dragged down by Australian rates

The key market movement over the past 24 hours has been a more than 1% fall in the NZD and AUD, as the market pared back RBA hikes after a softer than expected Australian CPI print and the PBoC skipped a day of setting a stronger CNY reference rate. Global rates have managed to push lower, despite key central bank heads reiterating their hawkish policy stances.

There hasn’t been much news overnight. The heads of the Fed, ECB, BoE and BoJ all spoke at the ECB’s annual conference in Portugal but no new views were expressed. All of them remained on message from recent policy updates with the first three reiterating the need for tight policy to bring inflation under control and the BoJ remaining dovish. Fed Chair Powell said that “although policy is restrictive, it many not be restrictive enough and it has not been restrictive for long enough”, keeping alive the chance of two more rate hikes this year. He wouldn’t rule out consecutive rate hikes, after keeping rates unchanged at the June meeting.

The BoJ remained the outlier and Governor Ueda still claimed that underlying inflation was “still a bit lower than 2%” when the evidence patently suggests otherwise, with data last week showing the CPI ex fresh food and energy series continuing merrily along its path of a strong and steady increase to 4.3% y/y, its highest rate since 1981.

The US goods trade deficit narrowed to $91.1b in May, with imports falling 2.7% and exports down 0.6%. This follows the particularly large $97.1b deficit in April and even a flat June result would see net exports subtract about 1 percentage point off Q2 GDP.

None of this has been particularly market moving. The US 2-year rate spiked up to 4.78% after Powell’s hawkish comments but the move wasn’t sustained. For the day, Treasury yields are down 4-5bps across the curve, with the 10-year rate currently at 3.71%. German and UK 10-year rates are down 4bps and 6bps respectively.

US equities are trading pretty flat, not a bad performance after some evident nerves yesterday after talk of the US government considering new restrictions on AI chip exports to China. Nvdia is down less than 1½% and the Nasdaq index is modestly higher as we go to print. As month and quarter end approaches there is chatter about the need for fund managers to rebalance away from equities, after their strong performance and towards bonds.

In currency markets the USD is broadly stronger and the NZD and AUD have been the two worst performers since this time yesterday, both down over 1%. Two factors can take the blame.  Firstly, after two consecutive days of the PBoC setting a stronger fix for CNY, yesterday the reference rate was in line with market expectations. This gave a signal that the central bank was more concerned with excessive movements in the yuan than the general direction. Overnight, USD/CNY traded above 7.25 for the first time this year, weighing on the NZD and AUD.

The other factor was that Australia’s CPI for May rose 5.6% y/y, much weaker than the market expected.  Even though inflation in the key services sector remained strong, the market pared back future tightening priced into the curve. Just 35bps of hikes is now priced for the rest of the year, and one has to look towards the September meeting for the next hike to be fully priced, with next week’s meeting priced at just 4bps. The move drove down the AUD and a further small loss has been sustained overnight and it currently trades just over 0.66.

The NZD has performed even worse, only partially explained by the flow of funds directed across the Tasman to pay for Taylor Swift tickets and associated travel costs for the Australian leg of her tour. The NZD traded an overnight low just below 0.6070 and currently sits not much higher than that. NZD/AUD spiked up 0.9260 before changing course and falling to as low as 0.9170 and currently back around 0.92.

NZD is weaker on all the crosses.  NZD/GBP traded below 0.46 for the first time since the depths of the COVID shock in 2020 and currently is back up through the figure. NZD/EUR has pushed below 0.56, with some support above the April low. NZD/JPY is down over 1% to 87.8. USD/JPY continues to push up towards the intervention zone, reaching as high as 144.60 overnight, but the lower global rates backdrop has limited the damage in the face of BoJ Ueda’s dovish comments.

Lower Australian rates dragged down NZ swap rates yesterday, with a parallel 4bps drop across the curve. NZGBs underperformed, with some notable curve steepening at the long end, following NZDM’s announcement of its debt issuance programme for July. While it was mostly in line with expectations, including a step up in weekly issuance from $400m to $500m and a syndicated tap of the 2033 bond next month, the market was spooked a little by the fact that long-end issuance could be as large as $150m in any given week. Still, a new protocol will see more flexibility around lines and volume to help the market absorb the large projected issuance programme. While the 5-year rate was unchanged on the day, the 10-year rate was up 3bps to 4.55%, with larger 4-5bps increases for the ultra-long bonds.

In the day ahead, the ANZ NZ business outlook survey might paint a picture of slightly better confidence and activity indicators, albeit still at historically low levels, along with weaker inflation indicators. Australian retail sales are also released, expected to remain soft. German CPI data is the key release tonight, while there will also be interest in whether the rising trend in US jobless claims has been sustained.