Risk sentiment is weaker after some key earnings misses and US labour market data remaining too strong for comfort. The US Treasuries curve is higher and steeper, with the 10-year rate up 10bps, and US equities are weaker. The USD is broadly stronger, while a strong Australian employment report yesterday sees the AUD higher than this time yesterday despite overnight weakness.
US labour market data remain too strong for comfort, reinforcing market expectations for another Fed rate hike next week and the chance of a follow up move. US initial jobless claims fell by 9k to a two-month low, giving no comfort of any significant easing in the labour market, even though figures at this time of the year need to be interpreted with caution due to seasonal factors. Continuing claims rose 33k to 1.75m, the largest increase in more than three months.
The Philadelphia Fed survey was little changed for the headline index, at -13.5, but there was a lot going on under the surface. New orders and shipments were particularly weak but most future indicators improved to levels not seen since 2021. And prices received surged from 0.1 to 23.0. A special survey question showed that 58% of firms indicated higher labour costs over the past three months and 30% of firms plan to increase wages and compensation by more than originally planned this year. In other economic news, US existing home sales fell 3.3%, continuing the theme of a lack of activity in the resale market due to low inventory, and this lack of supply driving buyers to the new home market.
The data triggered a selloff in US Treasuries, with higher rates after the European open extending through the US session. The 2-year rate is up 6bps to 4.83% while the 10-year rate is up 10bps to 3.85% after trading as high as 3.87%.
US equities are weaker, with the S&P500 currently down 0.6% and the Nasdaq index down 2%, both indices weighed down by 8-9% drops in Netflix and Tesla, after their disappointing earnings results. Semi-conductor chip makers are weaker after Taiwan Semiconductor Manufacturing said revenue could fall as much as 16% in the June quarter due to weaker global demand.
Russia has been bombing Ukraine’s Black Sea port cities, following its warning that it would treat grain ships as military targets after ending the UN grain export deal. Some 60,000 tonnes of grain held in storage facilities have been destroyed. Despite that news, wheat prices on the Chicago exchange are down a touch, albeit sustaining the more than 10% lift over the past couple of days.
There has been some action in currency markets. Yesterday, the PBoC set the yuan reference rate at the largest premium since November, stepping up its campaign to support the beleaguered currency. In addition, it raised the macro-prudential adjustment parameter for cross border funding to 1.5 from 1.25. This is a multiplier that determines the upper limit of outstanding cross-border financing an institution can have, making it easier for domestic firms to raise funds from overseas markets, another tool that works at the margin to support the yuan.
Despite USD strength overnight, driven by weaker risk appetite and its bounce-back from oversold levels at the end of last week, the yuan has sustained the recovery seen after PBoC’s actions, with USD/CNY below 7.18 from the prior 7.23 level.
The stronger yuan gave support to the NZD and AUD yesterday. The NZD managed to recover back over 0.63 but the stronger USD overnight has seen it fall 1% to 0.6225. The combination of a stronger yuan and a strong employment report, that keeps alive the prospect of further RBA hikes, drove AUD strength but it has reversed that move overnight on USD strength to trade at 0.6785, still higher than this time yesterday. Employment growth of 33k drove the unemployment rate down to 3.5% in June. NZD/AUD is down 0.8% on the day to 0.9180.
There has been less movement on other NZD crosses, with all the key majors weaker against the USD. USD/JPY is back above 140 while EUR and GBP are 0.6-0.8% weaker overnight.
Domestic rates were higher across the board, a combination of global forces and the short-end of the curve trading in the afterglow of the stronger than expected core CPI inflation figures released Wednesday. Higher Australian rates after the employment report added to the upside pressure to rates. The flattening bias continued, with the 2-year rate up 8bps to 5.51% and the 10-year rate up 5bps to 4.51%. The 2s10s curve has flattened by 14bps this week, taking it back to the minus 100bps level. NZGBs showed similar moves to the swap market, while the higher rates backdrop supported demand at the government’s weekly tender.
On the economic calendar, Japan CPI data today are expected to show relatively steady headline and core CPI inflation, well above the BoJ’s target, the last key figures ahead of next week’s policy meeting. Elsewhere, there are only second-tier releases.
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