US ISM manufacturing survey soft, consistent with recession in the sector. But US equities and US Treasury yields push higher in a holiday-shortened session. NZ QSBO today and a finely balanced RBA policy decision

Markets were quiet ahead of the US Thanksgiving holiday.  In a shortened trading session US equities nudged up further, following last week’s strong gain, and US Treasury yields also pushed higher, only temporarily impacted by another weak ISM manufacturing report. Net currency moves have been small and the NZD is slightly higher on the day near 0.6150.

The US ISM manufacturing index fell just under 1pt to 46.0 in June, its lowest level since the depths of COVID and while this was weaker than expected, the consensus looked optimistic in expecting a small uptick.  All key components are now in contractionary territory, with the employment index falling from 51.4 to 48.1, even if new orders did lift 3pts to 45.6. The commentary in the release said, “demand remains weak, production is slowing due to the lack of work, and suppliers have capacity”.

That the US manufacturing sector is still mired in recession is not really news and the impact on Treasuries proved temporary. The overnight low in the 10-year rate of 3.77% came in the aftermath of the release, but the market was soon back trading close to its high of the day, and it ended the shortened trading session just under 3.86, up 2bps from Friday’s US close and the NZ close. The curve continues to invert, with the 2-year rate up 4bps to 4.94%.

Higher rates and the softer data continue to be no barrier to US equity market performance, with all the key indices closing the holiday-shortened session with small gains after last week’s strong lift. The mood was buoyed by a near-7% gain in Tesla after its weekend report of stronger than expected quarterly sales following its price cuts.

In oil markets, Saudi Arabia said that it would extend its 1m barrels a day cut in production by a month, through August and it could extend it further. Russia added that it would reduce oil exports by 500,000 barrels per day in August and aim to reduce production by this amount. The announcements only had a temporary positive impact on oil prices before falling back. Brent crude is currently down less than 1% for the day and back below USD75 per barrel, suggesting little concern by traders, with the market seemingly well supplied compared to sluggish demand.

Currency markets show only small net movements overnight. The NZD spiked up near 0.6170 after the ISM release before falling back to 0.6150, a small gain from last week’s close. The AUD also shows a small gain to 0.6670. Yesterday, the PBoC continued with its recent minimalist intervention approach of setting a stronger CNY reference rate and this seemed to prevent further yuan weakness. JPY remains on the backfoot, with USD/JPY pushing up to 144.70. NZD/JPY briefly traded above 89 for the first time in eight years and currently sits just below that mark. Other NZD crosses are also slightly higher.

The domestic rates market had a quiet session, with global forces supporting a fall in rates. Swaps were down 1-3bps and NZGBs were down 2-4bps. The 10-year rate fell 4bps to 4.58% even as the market expects the syndicated tap of the 2033s will be launched mid-week.

Today sees the release of the NZ QSBO, expected to show a lift in confidence and activity indicators, as per the recent monthly readings of the ANZ survey. The value-add of the release will be the indicators on capacity pressures, expected to show a monetary policy-friendly fall, with businesses indicating they are seeing it much easier to find labour after the surge in net migration. The RBA’s policy decision later today is again finely balanced, with economists evenly divided on whether the Bank will take a pause or raise rates by 25bps again. The market prices only a 20% chance of a hike.