US equities have traded higher, as treasury yields retraced from the recent highs, and economic data suggested the economy remained resilient in the face of tariff uncertainty. The US House of Representatives passed Donald Trump’s tax bill which would cut taxes, reduce social spending and increase federal debt. The Euro Stoxx index closed 0.5% lower. Oil prices are little changed. Brent crude is trading near US$64 per barrel despite reports OPEC+ is considering further output hikes.
US manufacturing and service sector PMIs were both higher than consensus estimates. The composite index rose to 52.1 in May, up from 50.6 in April. The surveys suggest resilience despite the turmoil created by uncertainty about US economic policy. The responses likely reflect the improvement in sentiment after the de-escalation in US-China trade tensions.
Fed Governor Waller said he expects the impact on inflation from tariffs to be temporary, and the central bank could cut rates in the second half of year, if tariffs settle around 10%. He also added a return to higher import levies would have a much bigger impact on inflation and constrain the Fed’s ability to lower short term rates.
US treasuries recovered from an initial selloff, which saw 30-year yields surge to 5.15% after President Trump’s tax bill passed in the House. Fiscal concerns and the prospect of elevated supply continue to contribute to bond market volatility. The move to the yield highs was short lived and long bond yields have retraced close to 10bp. 10-year treasury yields are 5bp lower at 4.55%.
Euro-area PMIs point towards subdued economic activity. The composite index dropped to 49.5, from 50.4 in May. The weakness was primarily seen in the service sector and suggests economic uncertainty is weighing on activity. The market is pricing a 95% chance of a 25bp rate cut at the June ECB meeting, and around 50bp of easing by the end of the year.
The US dollar made broad based gains against G10 currencies with the soft PMI readings weighing on EUR/USD. The yen largely matched the decline in the euro. There was limited lasting impact from a statement by US and Japanese finance officials, that USD/JPY level reflect fundamentals, and exchange rates should be market determined. NZD/USD has traded back towards 0.5900 overnight in line with the broader US dollar move. The NZD is weaker against the pound, but otherwise little changed on the other major cross rates.
The Budget Economic and Fiscal Update was the focus for NZ fixed income in the local session yesterday. The updated NZGB borrowing programme increased by a modest NZ$4 billion over the forecast horizon. The 2025/26 programme was revised to NZ$38 billion, NZ$2 billion below the HYEFU projection. NZ Debt management (NZDM) expects to undertake four syndications in 2025/26, including three taps of existing nominal lines, and a new 2050 inflation-indexed bond.
A pre-Budget selloff in NZGBs, reflecting offshore moves reversed, and 10-year bond yields which peaked at 4.77% closed at 4.67%. Bonds outperformed swaps at the margin, with the lack of a material increase in borrowing, reducing supply risks. The long end of the linker curve underperformed given the announcement of the new line.
The weekly government bond tender, which was pushed back a day because of the Budget, is scheduled this afternoon. NZDM will offer the Apr-2029 ($250m), Apr-2033 ($150m) and May-2041 ($50m) maturities. The amount of interest rate risk to be absorbed by the market is relatively small, compared with recent weeks.
Australian 10-year bond futures are ~5bp lower in yield terms, since the local close yesterday, which suggests a lower bias for NZ yields on the open.
Turning to the day ahead, the only domestic release is Q1 retail sales. We are expecting a near zero real change for both the quarter and the year. Weakness in consumer spending is a key factor behind our relatively soft 0.3% GDP forecast for the March quarter. Japan CPI is scheduled, and retail sales are released in the UK and Canada.
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