It has been a quiet start to the week in what will likely be a quiet week overall, with a very light economic and event calendar. With UK and Japan holidays, trading conditions are lighter than normal. Global rates are slightly lower, with the US 10-year rate consolidating just below 4.5%. The NZD has spent most of the day consolidating just over 0.60, while the yen is weaker after last week’s strong recovery.
In light trading conditions, global rates have pushed lower, extending the falls seen last week that followed a run of weaker than expected US economic data and the Fed’s policy update. The week ahead will feature US Treasury issuance with the demand for duration tested by the auction of $67b of 10-year and 30-year bonds. There has been some slight curve flattening, with the 2-year rate up slightly and the 10-year rate down 2bps from last week’s close to 4.49%.
There are a number of FOMC speakers doing the rounds this week but they are unlikely to move the market. Most of them on the same page in terms of watching the data closely to determine the timing and scope for any policy easing, echoed by NY Fed President Williams overnight. Richmond Fed President Barkin, a voter this year, said he was optimistic that policy was restrictive enough to bring inflation down to target, saying “the full impact of higher rates is yet to come”.
US equities continue to enjoy a positive run, supported by a solid earnings season, up for a third consecutive session and back to within a couple of percent of the record high posted late-March. The S&P500 is currently up 0.8%.
In currency markets, net movements have been modest, except for some notable weakness in the yen after last week’s intervention-induced strong recovery. USD/JPY is up 0.6% from last week’s close to just under the 154 mark. Last week’s official intervention, estimated to be just under USD60b, did the job for now, but with the ongoing wide gap between US and Japan rates, there is some scepticism that the strong recovery in the yen can be sustained without a closing of that rates gap. Former US Treasury Secretary Summers said that “given the massive size of capital markets, I think the evidence is reasonably clear intervention doesn’t work – even in the scales that the Japanese engaged”. That said, increased volatility in the yen will make it more difficult for speculators to hold positions and it is likely that some will stay away for a while, making the currency less of a one-way bet, which was the real aim of intervention.
Despite some pullback in the yen, the NZD and AUD have managed to sustain last week’s gains. The AUD has pushed up to 0.6635, and the NZD is relatively flat at 0.6015, seeing NZD/AUD nudge down to 0.9075. There is little movement on the crosses overall, apart from a 0.6% gain in NZD/JPY to 92.5.
Oil prices are relatively flat, with Brent crude just over USD83 per barrel. Hamas said it has agreed to a Gaza cease-fire proposal put forward by Qatar and Egypt but Israel hasn’t agreed to the plan, currently in the process of being reviewed.
Domestic rates were dragged lower yesterday on global forces, in response in Friday’s night’s post-payrolls price action in the US. NZGB yields fell 4-6bps across the curve. The 10-year rate closed down 6bps to 4.77%, now well down from the late-April closing high of 5%. Payers were lurking around in the short-end of the swaps curve, so the 2-year rate fell by only 1bp to 4.99%, while 10-year swap fell 6bps to 4.61%.
On the calendar today, real retail sales for Australia are expected to show a modest contraction. In the RBA policy update, the Bank will need to acknowledge the positive inflation surprise and lower unemployment rate trajectory, so the tone of the statement could come across as more hawkish than the last neutral one. Elsewhere, the calendar will be light, tonight and through the rest of the week.
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