Strong US ADP private payrolls and the detail around the US Treasury’s bond supply plans saw the 10-year rate rise to its highest level since November and the curve has steepened further. Risk sentiment is much weaker, providing a boost to the USD, but much of the damage to the NZD was done yesterday after the NZ labour market reports supported the RBNZ’s on-hold policy stance.
US ADP private payrolls rose by a much larger than expected 324k in July. The health warning about these figures is that they are a poor indicator of non-farm payrolls (a much more important release, due Friday night), with last month’s ADP figure over-shooting the official private sector payrolls figure by a massive 348k. The wages components of the ADP report were friendlier, with workers who stayed in their jobs seeing a 6.2% pay increase, the weakest since November 2021 and for those who changed jobs the median pay rise was 10.2%, the weakest in two years.
The knee-jerk reaction to the ADP report was higher rates and a stronger USD. The 2-year Treasury yield rose as much as 7bps after the report, but has since fully unwound that move. The 10-year rate rose 10bps to 4.12%, breaking over the 4.09% peaks seen on two occasions this year and thereby taking it to its highest level since November, before falling back to the current rate of 4.08%, about 5bps higher since the NZ close.
The net move on the day has been a 6bps steepening in the 2s10s curve, the seventh consecutive daily steepening, taking the spread from minus 105bps to minus 82bps. For recession watchers, the rule of thumb is that it is not the inversion of the yield curve that provides the signal on timing of economic recession, but the subsequent steepening of the curve that gives the nod.
The mood for longer end Treasuries hasn’t been helped by the Treasury’s quarterly refunding plan. The plan for much greater bond issuance for the quarter ahead was given earlier this week, with $1 trillion of new supply, but the allocation of $103b for longer-term securities (3yr, 10yr, 30yr bonds) beginning next week was slightly larger than expected.
Yesterday, there was little market reaction to Fitch Ratings downgrading the sovereign credit rating for the US from AAA to AA+ reflecting “the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to AA and AAA rated peers over the last two decades”. Fitch joins S&P with its AA+ rating for the US (the downgrade taking place 12 years ago), making Moody’s the outlier amongst the major ratings agencies with its triple-A rating.
Following the steeper yield curve and ADP report, US stocks are much weaker, with the S&P500 currently down more than 1%, a rare move seen so far this year. Media reports say that US stocks are much weaker after Fitch downgraded the US rating, which is factually correct, but misleading as stock futures (and the bond market) saw little reaction after the announcement and it was only after the ADP print and Treasury refunding report that stock futures showed a meaningful decline.
Risk assets are generally weaker, with the VIX index up over 2 pts to 16 and oil prices taking a 2% hit, taking Brent crude to USD83 per barrel. The risk off session has lent some broadly based support to the USD.
The NZD is trading at 0.6085, only a small fall from the level at the NZ close, after tracking lower post the NZ labour market reports (more on that below). The AUD is the weakest of the key majors we follow, losing 0.6% overnight to 0.6545. NZD/AUD fell from over 0.93 to below 0.9260 in the aftermath of the labour market reports, but has subsequently recovered to around 0.93. The NZD is lower on all the other key crosses from this time yesterday, with NZD/JPY seeing the greatest fall to 87.2, with the yen showing some consolidation against the USD around the 143 mark following its post-BoJ depreciation.
NZ labour market data showed a strong 1.0% q/q lift in employment growth in Q2, enabled by a strong increase in labour supply, supported by net migration. Thus, the unemployment rate rose 2 ticks to 3.6% to its highest level in two years. The slightly easier than expected labour market conditions was also reflected in private sector labour cost inflation slightly undershooting expectations at 1.1% q/q. The overall message was a still-tight labour market but a slight easing pressure on wages, supporting the RBNZ’s on-hold policy stance.
The market appeared to be positioned for a positive surprise to the data, so the softer figures triggered lower rates and a weaker NZD. A knee-jerk fall in swap rates was met by some interest to pay swaps, reversing some of the movement. By the end of the day the curve was steeper, with the 2-year swap rate down 3bps to 5.48% and the 10-year rate was up 3bps to 4.68%. NZGBs also showed a steeper curve bias.
In the day ahead, expect to see weaker Australian retail sales for Q2 and a fall in China’s Caixin services PMI. The Bank of England is widely expected to hike its policy rate by 25bps to 5.25%, with a chance of a larger 50bps move according to market pricing. US productivity figures, jobless claims and the ISM services index are released tonight.
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