US initial jobless claims fall, Q1 GDP revised up, so run of positive US economic surprises continues. US rates much higher across the board. Projected Fed hikes seen more likely. US equities unperturbed. NZ business confidence improves further

Stronger than expected US economic data have driven US rates much higher across the board, with spillover into other rates markets. While the USD was also driven higher, this mostly offset prior losses, so the NZD is only slightly weaker overnight, currently 0.6065, and overall with only small net changes in currencies overnight.

The run of positive US economic data seen since mid-May – as evident in Citigroup’s US economic surprise index – continues. US initial jobless claims fell 26k last week to 239k, against expectations that the recent lift to around 265k would be sustained. The holiday-shortened week could have affected the figures and the four-week moving average continued to press higher, but the data raised a question mark over the extent of any easing in the labour market.

In its third estimate, US GDP for Q1 was revised up from 1.3% q/q annualised to 2.0%, and further away from the first estimate of 1.0%, with private consumption revised up to 4.2% annualised. The data painted a picture of a stronger than expected US economy at the beginning of the year. The core PCE deflator was revised down a tick to 4.9% annualised, while in a separate report pending home sales showed a larger than expected fall of 2.7% m/m in May.

Overall, the stronger data triggered a significant lift in interest rates across the board, with Treasuries extending the small sell-off during the Asian trading session, taking the rise in 2-year through to 10-year rates for the day to 14-17bps, with some mild curve flattening – the 2s10s inversion extending through minus 100bps. The 10-year rate is back near the top of its trading range this quarter, currently at 3.85%. The market now sees more chance of the Fed delivering on its additional projected rate hikes, with next month’s meeting priced at +21bps and a cumulative 35bps priced through to November, suggesting a 40% chance of two rate hikes from the current level.

German CPI data for June were in line with expectations, with annual headline inflation lifting from 6.3% to 6.8%, after last year’s generous public transport subsidies dropped out of the calculation. Spain became the first key developed nation to show inflation back below target, with annual headline inflation down to 1.6% y/y, even if slightly stronger than expected. Euro area CPI data due tonight aren’t expected to provide much comfort, with the core CPI expected to pick up to 5.5% y/y. Higher US Treasury yields were largely responsible for the lift in European yields overnight, with Germany’s 10-year rate up 10bps to 2.41%.

The prospect of more rate hikes hasn’t dampened enthusiasm for US equities, with the S&P500 currently up 0.2%, the market not minding higher rates under the conditions of a stronger than expected economy. There’s also the theory that the higher rates go this year, the greater the likelihood of easier policy next year. Expectations for rate cuts next year in the order of 140-150bps have been relatively steady over the past couple of months.

While the data boosted the USD, this mostly reversed some weakness seen between the NZ close and ahead of the release, so the USD is barely higher from where we left it yesterday. Ahead of the data, the NZD had recovered back just over 0.61, and it now sits around 0.6065. The AUD actually made a small gain overnight to 0.6620, seeing NZD/AUD fall to 0.9160. The AUD was boosted yesterday after Australian retail sales rose 0.7% in May, a clear positive surprise that saw a reversal of rate falls seen after the previous day’s weaker monthly CPI print. The two data releases have added a layer of uncertainty over whether the RBA will hike next week or pause for a month. A 25bps rate hike next week is now given about a 35% chance by the market.

After a day off protesting yuan weakness, the PBoC was back at it, setting a much stronger CNY reference rate, with the premium relative to the Bloomberg consensus the largest by far this year. However, the boost to the yuan from this move proved temporary, against the backdrop of fundamental forces – such as the divergence between the Fed and PBoC’s monetary policy stance – that argue for a weaker yuan. USD/CNH rose up through 7.27 overnight and notably this hasn’t been a particular drag on AUD performance overnight, or the NZD for that matter.

USD/JPY has traded up to 144.90, getting close to levels which have seen official intervention. Apart from a weaker NZD/AUD as noted, NZD cross movements have been small.

In local data, confidence and activity indicators perked up in the ANZ business outlook survey, a continuation of the recent trend, with the key own-activity indicator in positive territory for the first time in just over a year. One can understand the improvement in confidence, with many businesses now able to find staff after the surge in net migration and the RBNZ signalling rates have likely peaked. Inflation indicators are also moving in the right direction even if they still remain uncomfortably high. A small boost to the NZD after the release proved temporary.

Global forces drove NZ rates down in early trading and then higher Australian rates after the retail sales report drove NZ rates back up. The 2-year rate ended the day up 3bps to 5.40% after falling as low as 5.33%. Swaps were up 1bp across the rest of the curve. NZGB underperformance continued, with the announcement of the syndication panel for the 2033 tap raising the chance that this would proceed next week, while the market also had to absorb another $400m of supply. NZGBs were up 2-3bps across most of the curve, with a 4-5bps lift for the ultra-long bonds. The 10-year Australian bond future is up 10bps in yield terms overnight, which will put upward pressure on local rates from the open.

The economic calendar is packed over the day ahead. During NZ trading hours we’ll see NZ consumer confidence, Tokyo CPI figures and China PMI data. The key releases tonight are Euro area CPI inflation and US consumer spending data alongside the core PCE deflator. The latter shows expectations finely balanced between a 0.3-0.4% m/m increase, with annual inflation remaining steady at 4.7%.