Higher US equities, global rates curves re-steepen, US 10-year rate pushes higher. NZD flat around 0.61; yen the weakest of the majors. US government shutdown chatter restarts

The new week has begun with a recovery in risk appetite after last week’s hit. US equities have recovered some lost ground and yield curves are steepening, led by increasing rates at the long end. Currency markets show modest moves, with the NZD hovering around the 0.61 mark.

Last week our risk appetite index fell from 69% to 57% and the new week has kicked out with a modest recovery of sorts, with the VIX index down a point to 16.  The S&P500 is currently up 0.7%, recovering nearly a third of last week’s loss. After Friday’s consolidation post payrolls, the US Treasury’s curve is back to a steepening mode, with the 2-year rate down slightly and the 10-year rate up 4bps on the day to 4.07%, after an overnight high of 4.12%. The market is trading cautiously ahead of the new upscaled bond auctions this week and the key US CPI report later in the week.

The NY times published an interview with NY Fed President Williams, who seemed to be just following the official FOMC line – how high the peak policy rate needs to go and how long it remains that high will be data dependent, and rates cuts may be required next year or in 2025 to ensure that real interest rates don’t rise further if inflation keeps falling. Fed Governor Bowman showed off her hawkish credentials, repeating her weekend message, at a different event overnight, that she supported the rate hike in July and she expected the need for additional rate increases.

German short-term debt was in high demand after the Bundesbank’s late-Friday announcement that it would slash the rate paid on domestic government deposits to 0% from 1 October (currently around 3.45%). Investors flocked to German bills, 2-year notes and other short-term securities, seeing Germany’s 2-year bunds rate down 5bps against a backdrop of higher rates, as the 30-year rate rose as much as 9bps to 2.72%, its highest rate since early 2014.

The economic calendar has been light, but Germany industrial production fell by a larger than expected 1.5% m/m in June, a second consecutive monthly decline and extending the general malaise for the manufacturing sector. Poor demand from China, worker shortages, higher interest rates and lingering fallout from last year’s energy crisis have all been cited as factors.

In other news, analysts are alluding to the risk of a possible US government shutdown after fiscal year-end 30 September, a re-run of 2018-19 and 1995, when federal funding runs out at that date. Unlike the debt-limit fight, a threat of debt default is not at risk, but a government shutdown would result in things like closed government facilities and delays to economic releases. The media report that Republicans are emboldened by the ratings downgrade by Fitch Ratings, to cut spending and bring the deficit under control. For the market, this issue could gather steam just as we head towards the next FOMC policy meeting in late-September, and it could be a factor in the Fed’s decision on rates. Previous government shutdowns have been a factor in reducing US Treasury yields.

There isn’t much to report on currency markets, with the USD broadly flat and modest movements overall. The yen is the weakest of the majors, down 0.5% from Friday’s close, seeing USD/JPY just under 142.50, the GBP is the strongest, with a 0.3% gain to 1.2780. The NZD has been tracking sideways from Monday’s open, hovering around 0.61. The AUD has also been tracking sideways, around 0.6570. NZD/JPY is the biggest cross mover, tracking up to just under 87.

The domestic rates market was quiet, given the NSW bank holiday in Australia. Rates were pushed lower following the global moves seen after the non-farm payrolls report on Friday night. NZGB yields fell 6-7bps across the curve, with the 10-year rate closing at 4.75%. Swap rates were down 4-8bps, showed a more concerted flattening bias.

In the day ahead, there are mainly second-tier economic releases. Chinese trade data due later today is probably the pick of the bunch, which will provide more colour on the state of global demand and domestic demand in China. We suspect markets will be in a holding pattern until key US CPI data are released Thursday night.