US equities slipped in overnight trade though remained above the 3-month lows reached earlier in the week at the height of the bond market selloff. Oil prices extended lower having suffered the largest daily decline in a year the previous day. Brent crude fell to lows near US$84 per barrel, down 14% from the late September highs. Global bond yields are lower with more subdued market moves after the recent volatility and the US dollar is weaker.
US initial jobless claims remained steady at 207k which was marginally below consensus estimates for 210k. The 4-week moving average edged down to 209k. This is the lowest since February and points towards resilience in the labour market ahead of key nonfarm payrolls data released this evening. Continuing claims were also little changed at 1.7 million in the week ending September 23.
The US trade deficit fell to $58.3bn in August, its lowest level since June 2020. Exports rose 1.6% m/m and Americans reduced spending on goods from overseas with imports falling 0.7%m/m which points to softer domestic demand following rapidly rising borrowing costs. Net trade is expected to make a positive contribution to Q3 GDP.
US treasury yields edged lower across the curve not withstanding a small spike higher aligned with the jobless claims data. US 10-year yields increased from 4.71% up to the session highs of 4.77% before retracing quickly back to pre-data levels. The reaction to claims data was unusually large and points to ongoing fragile sentiment after the significant bond market weakness recently. 2-year treasury yields fell 3bps contributing to a further steepening of the 2y/10y curve to -30bp.
European bond markets also moved lower in yield. 10-year bund yields closed down 4bp to 2.88%. Bank of England (BOE) Deputy Governor Broadbent warned that there are ‘clear signs’ that higher rates are creating a drag on the economy and causing unemployment to pick up. Front end gilt yields fell 6bp while 10-year yields ended down 4bps at 4.54%. The market is pricing about 15bp of additional hikes by the BOE and a 30% chance of a 25bps hike at the next meeting in early November.
In currency markets, the US dollar was marginally weaker. EUR/USD oscillated in a narrow range around 1.0520 while USD/JPY retested the Asian session lows near 148.40. USD/JPY dropped sharply yesterday afternoon with the market still on edge following the ‘flash crash’ earlier in the week where USD/JPY fell close to 2% in a matter of seconds. After a temporary dip, NZD/USD is marginally higher overnight. NZD/AUD traded higher since the local close, and is back toward 0.9370, having largely retraced the post-RBNZ fall.
An initial offshore driven rally across NZ fixed interest markets faded ahead of weekly supply from New Zealand Debt Management in the local session yesterday. Bid-cover ratios across the 15 May 2028 and 15 April 2033 maturities were below average with the latter bond offered for the first time since the tap syndication back in July. The May 2041 line was well supported. 10-year bonds closed down 2bps at 5.52% with government bonds marginally underperforming swaps. The New Zealand Local Government Funding Agency (LGFA) announced it has raised its 2023/24 bond issuance programme by NZ$300 million to NZ$4.5 billion. The increase reflects larger-than-expected funding requirements from councils.
There is no regional data of note today. US labour market data will be the focus overnight. Consensus expectations are for a 168k increase in nonfarm payrolls while the unemployment rate is expected to dip to 3.7% after the 0.3% jump to 3.8% in August.
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