Much stronger than expected US PMI data drove US rates and the USD higher and US equities lower. This saw the NZD lose earlier gains, but the spillover from the hawkish RBNZ policy update continued, with domestic rates higher

Much stronger than expected US PMI data drove US rates and the USD higher and US equities lower overnight. This saw the NZD lose earlier gains, and it trades back just under 0.61.  The spillover from Wednesday’s hawkish RBNZ policy update continued, with domestic rates higher, led by the short-end, NZD/AUD rising to a fresh five-week high, and NZD/JPY up to a 17-year high.

In market-moving news overnight, the US composite PMI index rose by 3.1pts to 54.4, its highest level since April 2022, compared to expectations of a flat result.  The gain was driven by the services sector, with that index up 3.5pts to 54.8. The manufacturing index gained by less than a point to 50.9. The data pointed to lingering economic resilience in the services sector, which will make the job harder to bring inflation down. Composite measures of input and output prices also increased.

With the strong data following a month-long period of US economic releases mostly surprising on the negative side, there was a larger than usual impact on the market, driving US rates and the USD higher and US equities lower.  Adding to that mood, initial jobless claims fell by slightly more than expected to 215k – the two-week decline bringing the figure back down to its average for this year and suggesting that the spike higher two weeks ago was an anomaly.  Jobless claims have yet to meaningful show the increase being forewarned by other softening labour market indicators. New home sales were weaker than expected at 634k, continuing the run of softer housing market data.

US Treasury yields are up 4-6bps across the curve, led by the belly.  The 10-year rate is currently trading up 5bps at 4.47%, after the market found support just under 4.5%. The Fed Funds market is back to pricing just 35bps of cuts this year, with November no longer fully priced. Higher US Treasury yields spilled over into other markets, with Germany’s 10-year rate up 6bps and UK’s 10-year rate up 3bps.

US equities notably weakened after the PMI report. After the S&P500 opened 0.7% higher, the index now shows a 0.7% fall. This is despite market-darling Nvidia’s share price rising 10%, after it once again delivered a very strong earnings report, while adding in a stock-split and dividend increase into the mix.

The USD was broadly weaker heading into the PMI release, before sustaining a rebound.  The NZD was trading above 0.6130 ahead of the release and has subsequently fallen to just below 0.61. The AUD broke up through 0.6650, before falling just below 0.66. USD/JPY briefly traded above the 157 mark for the first time since the official Japanese intervention earlier this month and currently sits just below the figure.

On the NZD crosses, NZD/AUD continues to feel the impact of the more hawkish RBNZ update on Wednesday, rising to a five-week high just under 0.9240. NZD/JPY rose to a fresh 17-year high of 96.1 before meeting some resistance and it has fallen back to 95.6.

The PMI data across Europe showed gains for the manufacturing sector across the board (Germany, UK, Euro area) and higher than expected, adding to the sense that the global manufacturing sector is enjoying an upswing. The PMIs across the services sector were mixed, higher for Germany, relatively flat for the Euro area and UK data underwhelming.

Also of note, Euro area negotiated wages reported by the ECB rose 4.7% y/y in Q1, up from 4.5% in the previous quarter and against expectations that wage inflation would moderate. However, the ECB’s report on wages noted that “wage pressures look set to decelerate in 2024…ECB wage tracker data for the first few months of the year, when most agreements take place, indicate that negotiated wage pressures are moderating”.

The data, alongside the backdrop of higher US rates, saw the market pare some ECB easing priced into the curve, with 59bps of cuts priced for this year (down from 64bps priced yesterday).  A June rate cut still remains a high-probability event, but the ECB is likely to pause in July and the scope for further easing will depend on the dataflow. Speaking after the data, Bank of France Governor de Galhau said “we are very probably” going to cut in the June meeting and he noted that Germany caused the one-off blip in higher wages and wages decelerated significantly in other countries.

Yesterday, the domestic rates market was still re-positioning after the hawkish RBNZ on Wednesday, with offshore investors particularly shocked by the tone and they were positioned for imminently lower rates. This saw the market underperform on a cross market basis, with a further short-end led sell-off in NZGBs, with yields up 8bps for the 2-year and 4bps for the ultra-long bonds. Demand at the weekly bond tender was tepid, with the 2032 bonds attracting a bid-cover ratio of just 1.3.  The swaps market showed similar curve flattening, with the 2-year rate up 8bps to 5.07% and the 10-year rate up 3bps to 4.57%.

NZ retail sales were stronger than expected in Q1.  The 0.5%q/q in real sales followed eight consecutive quarterly contractions, but the market didn’t read too much into the bounce, given the timelier anecdotes that suggest the retail sector is still under immense pressure.

In the day ahead the economic calendar is full. Domestic releases include consumer confidence and trade. Annual Japan CPI inflation is expected to moderate, as forewarned by previously released Tokyo data, with removal of some education fees a notable factor. Tonight sees the release of UK and Canadian retail sales, while in the US, durable goods orders and the final readings for US consumer sentiment and inflation expectations from the University of Michigan survey are released. Fed Governor Waller is likely to repeat his relatively hawkish message.