Newsflow has remained light, with signs of consolidation in US Treasuries and a small fall in the S&P500. The NZD has shown signs of consolidation after its recent pummelling and has been the top performing major over the day, seeing it higher on the crosses, supported by higher interest rates.
The US 10-year rate hit a fresh 16-year high of 4.36%, but the market is showing some signs of consolidation, with the yield falling back towards 4.3%, a couple of bps lower from where we left it yesterday and down 1bps on the day. The curve has flattened, with the 2-year rate up 2bps, and back up through the 5% mark. Yesterday, Japan’s 10-year government rate reached 0.665%, its highest level since 2014, the BoJ not showing much protest as the yield drifts higher in an orderly fashion.
The dataflow has remained very light. US existing home sales fell a greater than expected 2.2% m/m in July, taking the level of sales back near the cycle low. The lack of sales reflects a lack of inventory, as homeowners are reluctant to shift, which would result in them needing to refinance their mortgage rate at a much higher level.
US equities have adopted a more cautious tone, after yesterday’s rally which broke a losing streak. The S&P500 is currently down 0.3%. There is much hype and anticipation about Nvidia’s earnings report tomorrow, where the market is positioned for another significant beat. An in-line or disappointing announcement would rock the market. Two big-name US retailers show large double-digit falls, with earnings results showing signs of a weaker consumer. Dick’s Sporting Goods reported weaker sales than expected and excess inventory. Macy’s reported negative sales growth and rising delinquencies in credit-card payments. Both companies noted rising theft of merchandise, a sign of the times.
In currency markets, the PBoC set the CNY fix at its strongest rate relative to market estimates since Bloomberg began the daily survey in 2018 and has engineered a funding squeeze to make it more expensive to short the yuan. For all that effort, USD/CNH is slightly higher on the day, but at least the rate of depreciation of the yuan is being well managed against poor economic and market fundamentals.
Currency moves have been generally modest. The NZD is showing signs of consolidation after its recent pummelling, being modestly higher on the day near 0.5950, after trading just over 0.5970 last night. We note below wider NZ-global rate spreads, which might be offering some support to the currency. NZD/AUD is slightly higher at 0.9260, with the AUD where we left yesterday at 0.6425. EUR and GBP have been on the soft side of the ledger, seeing NZD/EUR and NZD/GBP recover from their multi-year lows, to 0.5480 and 0.4670 respectively. Higher JGB yields against a backdrop of lower US and European 10-year rates have helped support the yen.
Domestic rates were higher yesterday on global forces combined with some local market underperformance, particularly in NZGBs. They were up 9-10bps across the curve, seeing the 10-year rate close at a fresh 12-year high of 5.15%. The 10-year bond-swap spread moved deeper into negative territory, close to minus 16bps. Forays into negative territory are rare, evident in the data in the GFC and immediate post-GFC period, and during the period of peak-COVID fear. It is not usually a sustainable state of affairs but, at present, there is a lack of appetite for government debt relative to taking on duration risk in the swap market.
In the realms of other weird stuff going on in the domestic rates market, another RBNZ rate hike is seen more likely than for the Fed or RBA, despite the RBNZ’s “conviction” that it has done enough to bring inflation down, especially with the economy mired in recession, while both Australia and the US have much stronger relative economies, and Australia’s real policy rate is barely positive.
In the day ahead, NZ Q2 real retail sales are released, which are too dated to excite the market but for the record the consensus is picking another quarterly contraction, making it three in a row or five of the past six quarters in negative territory. Happy days in the retail sector, not. The market will be more interested in the set of global PMIs with a consensus view of manufacturing PMIs remaining in sub-50 territory and some further slippage in the services PMIs.
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