A benign US CPI print in line with market expectations cemented in the view that the Fed is probably done hiking this cycle. US Treasuries have been impacted more by supply than the data, with the 10-year rate up to 4.08% after tepid demand at the 30-year bond auction. Net currency moves have been mainly small, but with notable under-performance by the yen and small under-performance by the NZD.
In a quiet week the key release on the calendar was the keenly anticipated US CPI report, released overnight. The inflation data came in close to market expectations, with both the headline and core (CPI ex food and energy) rates rising by 0.2% m/m, the latter a rounded 0.16%, marking the smallest back-to-back gains in more than two years. Annual inflation rose two ticks to 3.2% for the headline, due to base effects, while annual core inflation was down a tick to 4.7%.
Other core inflation measures also fed the narrative that inflation was much closer to being under control compared to the last year or two. The annualised monthly rate for the Cleveland trimmed mean fell to a 2½-year low of 2.6%, the third sub-3% reading in a row, while the equivalent Atlanta Fed sticky CPI measure was also close to a 2½-year low, even if it did tick slightly higher to 3.1%. The closely watched “super-core” measure based on core CPI services ex housing rose by 0.2% m/m, up slightly from the previous month, but low enough for a central bank that would be happy with annualised 2-3% inflation at the moment.
The data reinforced the widely held view that the Fed could skip a hike at the next meeting in September, but kept alive the possibility of a further possible hike later in the year. The OIS market prices a cumulative 8bps of hikes through to the November meeting, a basis point lower from yesterday. The next key focus turns to Chair Powell at Jackson Hole in a couple of weeks. Furthermore, there is one more CPI print and another payrolls report before the September meeting. Speaking a few hours after the CPI, San Francisco Fed President Daly (a non-voter this year), said the result was largely as expected and that is good news but “it is not a data point that says victory is ours…there’s still more work to do”.
In other economic news, US initial jobless claims rose a chunky 21k last week to 248k, but still consistent with a flat trend over the past five months.
The knee jerk reaction to the CPI report was lower rates, but that quickly faded before focus turned to increased Treasury supply. The $23b auction of 30-year bonds was awarded at more than 1bp higher than the when-issued yield, despite some cheapening leading up to the event, suggesting tepid interest. Rates jumped higher across the board after the announcement and, as we go to print, the curve shows a steeper bias, with the 2-year rate up only slightly for the day and the 10-year rate up 7bps to 4.08% (much higher than the spike down at 3.94%).
The USD also showed a knee-jerk fall after the CPI, but it has recovered lost ground and is now close to flat for the day. After spiking up through 0.61 overnight the USD recovery has pushed the NZD down close to its low for the day, around 0.6035. The AUD showed a similar pattern, spiking up through 0.66 post-CPI and now back down to 0.6535. The NZD has underperformed slightly, seeing NZD/AUD drift down to 0.9240.
Not helping the Antipodean currencies, the mood around China remains negative. The China Securities Regulatory Commission plans to convene a meeting with some property developers and financial institutions later today. This follows one major developer, Country Garden Holdings, missing a coupon payment earlier this week and who isn’t invited to the meeting, suggesting some plan to prevent a default for the company and contain contagion risk across the sector.
Of the majors, the yen has been the weakest, with USD.JPY up 0.7% on the day to 144.70, seeing NZD/JPY up modestly to 87.3. The combo of a weaker NZD and slightly stronger Euro sees NZD/EUR down to a fresh three-year low, just below 0.55. NZD/GBP has been spared the same fate, hanging in there just over 0.4750.
US equity futures were stronger post-CPI but after the cash market opened on a positive note, gains have been eroded and, as we go to print, the S&P500 shows only a small gain. After their strong run, oil prices are down over 1%, seeing Brent crude with a USD86 handle after touching as high as USD88 in late Asian trading.
The domestic rates market showed a net 1-2bps lift in NZGBs and a net 2-3bps lift in swap rates. The bond market traded heavy for most of the day, cheapening ahead of the government’s bond tender, adding to the NZ market’s recent underperformance against Australia. The bonds cleared slightly below mid yields at the time of pricing, which came of some relief to the market, seeing rates push lower into the close.
In the day ahead we get NZ manufacturing PMI and food price data. Tonight sees the first release of Q2 UK GDP, expected to come in flat, while in the US the key releases are the PPI and University of Michigan consumer sentiment and inflation expectations measures.
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