US initial jobless claims data in sign of lingering labour market reslience. US Treasury yields higher, US equities lower and broad-based recovery in the USD

Against a backdrop of jobless claims data showing ongoing US labour market resilience, US Treasuries yields are slightly higher, the USD is broadly stronger and US equities are weaker. The NZD is trading back down around 0.5925.

Newsflow has been light as the market keenly anticipates what Fed Chair Powell will say at his Jackson Hole speech tonight.  He is expected to reiterate the “job not done yet” view on inflation, with further hikes dependent on forthcoming data on inflation and the labour market. On that note, the US labour market remains resilient. US initial jobless claims dropped 10k last week to 230k, consistent with a flat trend over the past six months, so no discernible uptrend of late that is required to drive the unemployment rate higher to reduce labour market pressures.

In other economic news, US durable goods orders plunged 5.2% in July, after higher aircraft orders had boosted the June figures. Non-defence ex aircraft capital goods orders, a core measure that feeds into GDP, rose a tepid 0.1% m/m after a downwardly revised 0.4% drop in June, suggesting a backdrop of soft business investment.

Ahead of the Jackson Hole symposium there have been mixed messages by central bank policy makers. On the hawkish side, Boston Fed President Collins was open to the need to tighten policy further. She was not willing to signal that the peak was right at this point, “we may have more to do”, after which “we can hold for a substantial amount of time”. In the on-hold camp, Philadelphia Fed President Harker said the Fed had likely undertaken sufficient tightening and “I can see us staying steady throughout the rest of the year”.

On the ECB’s next move, Portugal’s central bank Governor Centeno said “we have to be cautious this time around because downside risks that we identified in June in our forecast have materialised”, adding that there was still plenty of data to come ahead of the September meeting.

US Treasury yields have pushed higher, with the 10-year rate a couple of bps higher from the NZ close, to 4.22%, while the 2-year rate has returned to the 5% mark, reversing the previous day’s move lower. Higher Treasury yields are against a backdrop of flat to slightly lower European rates, providing a boost to the USD.

The USD is broadly stronger, reversing the fall over the previous day. This sees EUR and GBP trading back down towards the 1.08 and 1.26 level respectively. The NZD has steadily declined since we left it yesterday, down to the current level around 0.5925. Ditto for the AUD, down to 0.6420, with NZD/AUD steady around 0.9220. Against a backdrop of higher Treasury yields, USD/JPY has steadily climbed to 145.80.

In equity markets, the hype around Nvidia looked justified after its reported earnings and forward guidance superseded expectations by a wide margin, but a decent 2½% gain for this mega stock hasn’t prevented the S&P500 falling close to 1%, reversing strength over the previous session.

The domestic rates market felt the full force of lower global rates through the prior overnight session with a bias for some curve flattening.  The 5-year swap rate was down as much as 14bps, ahead of pricing for BNZ’s sizeable $1b 5-year fixed rate bond issue, before closing the day down 8bps at 4.94%. The 2-year and 10-year swap rate were down by 4bps and 9bps respectively.

At the government’s weekly $500m bond tender, there was decent demand for the longer-term issues on offer, but tepid demand for the 2027 bonds, which were issued some 2bps above pre-tender mids and with a 3bps tail – the demand profile was consistent with the swaps spread curve, with longer dated NZGB yields below swaps, a rare event, and the more normal positive gap between swap and bond yields at the shorter end of the curve. Since the NZ close, the Australian 10-year bond future is up just 1 bp in yield terms, setting the scene for minimal change in rates on the open.

In the day ahead, Tokyo CPI data are expected to show annual headline inflation slipping to 3% and core inflation steady at 4.0%, a leading indicator of the nationwide data later in the reporting cycle, but the market focus will be on Jackson Hole tonight.