US equities were little changed to start the week with the S&P remaining close to 16-month highs having risen 3% in July. 10-year treasuries are trading near 3.95% and the US dollar is mixed. Oil prices extended recent gains with Brent prices up nearly 15% in July amid signs the market is tightening as OPEC+ cuts back production.
Chinese equities advanced with officials announcing more measures to support the construction sector and boost consumption. An index of Chinese stocks listed in Hong Kong has rebounded more than 10% from the lows last week. The National Development and Reform Commission released a policy document focussed on removing government restrictions on consumption. The latest PMI data points towards weak activity with the composite index for July falling to 51.1 from 52.3 and the services sector index slipping more than expected.
Following on from Friday’s adjustment to the yield curve control mechanism, the Bank of Japan announced an unscheduled bond purchase operation for ¥300b of 5-to-10- year notes. The size of the operation suggests this is a smoothing operation to signal to the market that the move last week, which took 10-year JGB yields to the highest level since 2014, may have gone far enough for now. Yields moved higher across the curve with 10-year bonds closing up 6 bps at 0.60%.
The euro-are economy returned to growth with Q2 GDP advancing 0.3%q/q. Preliminary CPI data for July was in line with expectations at 5.3%, down from 5.5% in June. However, core CPI was higher than anticipated by 0.1%, remaining unchanged from June at 5.5%. Market pricing for the September ECB meeting remains slightly below a 50% chance of a 25bps hike and was little changed following the data.
Outside of the moves in JGBs, global bond markets were little changed. U.S. Treasuries are 1-2 bps lower in yield across the curve. Fed president Goolbee noted that lower inflation is positive but that he hadn't decided whether to support pausing rates at the next policy meeting. Market pricing for the Fed is steady with around 11 basis points of rate hike premium priced over the next two policy meetings which is largely unchanged from the end of last week.
In currency markets, the US Dollar was stable against major European pairings and advanced against the Yen. USD/JPY extended the gains from last week trading above 142.50 overnight following news that the BOJ was undertaking a smoothing operation to cap JGB yields. Commodity sensitive G10 currencies were stronger against the US Dollar. NZD/USD traded back up towards 0.6220 with the gains matched by the AUD resulting in NZD/AUD remaining stable near 0.9250.
NZ domestic fixed income markets had a strong open for the week with 10-year bonds falling 10bps reflecting moves in international markets. However, the move lower couldn’t be sustained, and yields drifted higher to close down 5bps in a largely parallel move across the government curve. The NZ$5 billion tap syndication of the
4 April 2033 maturity was incorporated into several widely followed benchmarks at month-end resulting in demand. Australian 3-year and 10-year bond futures are close to 5bps lower yield in the overnight session from the local close yesterday.
The main regional focus today will be the RBA monetary policy decision. We expect the RBA will hold rates steady and maintain a tightening bias. Markets are pricing a ~20% chance of a 25bps hike though a small majority of the 26 economists surveyed by Bloomberg anticipate a hike. Market pricing for a rate hike fell following softer than expected Q2 inflation last week.
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