Higher US Treasury yields and a broadly stronger USD are the themes of the day. The AUD is much weaker after the RBA’s on-hold decision and the NZD is faring poorly as well.
US Treasury rates are higher across the curve, driven by the long end. Rates began to lift from the US open and, while there was no particular trigger, the move comes a day after the Treasury department said it would increase its net borrowing estimate for Q3 to $1 trillion, compared to its $733b estimate of three months ago. There will be no shortage of US bond supply in the near future, that’s for sure. Tomorrow the Treasury will announce the size of its forthcoming bond auctions, which is expected to feature across the board increases.
The bond market is also adjusting to the move higher in JGB yields after the BoJ tweaked its yield curve control policy last week to potentially allow the 10-year rate to rise to a maximum of 1%. There has been plenty of market commentary over recent days on how higher Japanese rates could unleash a tsunami of Japanese investors to sell their overseas bond holdings and return to their domestic market, putting upward pressure on global rates.
As we go to print, the 2-year rate is up 3bps on the day to 4.91% while the 10 to 30-year rates are up in the order of 9-10bps. The 10-year rate is up to 4.05%, getting close to the peak level this year of 4.09% seen in March and July. The 30-year rate traded at 4.11%, its highest level since November.
Rates consolidated at their higher levels after US economic data releases were more or less in line with consensus estimates. The JOLTS report showed job openings falling to 9.582m their lowest level since April 2021, while the job openings to unemployed ratio rose slightly to 1.61. While this remains well above the 1 ratio which would make the Fed more comfortable, analysts note that the figures are overstated, given the low cost of maintaining job openings. Pantheon Macroeconomics suggests that the figure includes “ghost” openings, or job offers that remain advertised in the hope that they might attract an exceptional candidate.
The ISM manufacturing index rose slightly to 46.4, suggesting activity in the sector contracted for the ninth consecutive month. Of note, the employment index fell to a three-year low of 44.4, suggesting the sector is shedding staff at an increasing pace, although manufacturing makes up a small proportion of the economy these days.
Higher US Treasury yields have spilled over into other markets, with European 10-year rates up in the order of 6-9bps. Equity markets are softer, with the S&P500 currently down modestly, and the Euro Stoxx 600 index closed down 0.9%.
The USD is broadly stronger, with dollar indices up 0.5-0.6% for the day. The AUD has been the weakest performer after the RBA opted to keep policy on hold, against market expectations of a 20% chance of a hike and economist expectations that had a slightly majority expecting a lift. While the Bank maintained a tightening bias, the lack of policy move saw a number of economists shave back their expectations of peak rates from 4.6% to 4.35%. Market pricing shows an 80% chance of one more hike this cycle, with November being the most likely date, following the next quarterly CPI result.
The AUD is down a chunky 1.6% from this time yesterday, finding support just over 0.66. The weaker AUD has spilled over into a weaker NZD but other factors in play include a weaker yuan, not helped by another soft PMI print, this time the Caixin manufacturing index, and the backdrop of the broadly stronger USD. The NZD has traded down towards 0.6130, while NZD/AUD took a brief peak above 0.93 and currently sits just below the figure. Other NZD crosses are all slightly lower overnight and from this time yesterday.
The Euro has been the strongest of the rest of the majors, with EUR/USD only down modestly to 1.0975 and NZD/EUR falling nearly 1% to just under 0.56. It wasn’t a market mover, but of note the unemployment rate in the Euro area was a record low of 6.4% in June, with revisions over the prior two months also taking the figures to that low. This is notable considering how close to recession the Euro area has been. The same applies to NZ – close to recessionary conditions but the unemployment rate remaining low, an unusual feature of the current economic cycle.
The GDT dairy auction was yet another poor one, with the price index down by 4.3%, pulled down by an 8% plunge in whole milk powder. Such a large fall will increase the chance of further downgrades to Fonterra milk payouts for the season. Falling dairy prices and NZ commodity prices in general went against the grain of higher global commodity prices in July, a worrying trend for NZ’s terms of trade.
In the domestic rates market, NZGBs were 3-4bps higher across the curve. The 2-year swap rate closed 2bps higher at 5.50% while the 10-year rate was up 4bps to 4.65%. The RBA’s on-hold decision was after the NZ close and, while Australian rates fell after the decision, the Treasuries move overnight has seen that move reverse. The net move in Australian bond futures has been about a 3bps lift in yield since the NZ close.
In the day ahead, NZ labour market data will be a key focus. While indicators suggest that employment growth and wage inflation are likely to remain solid, we don’t see them changing the trajectory of an RBNZ being on hold for the foreseeable future. US ADP employment data tonight should be ignored, given its recent poor track record as an indicator of the more important non-farm payrolls figure due at the end of the week.
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