US manufacturing ISM softer than expected reflecting the uncertain economic backdrop. Crude oil prices climbed more than 2% despite news that OPEC+ had agreed to increase oil output

After registering solid gains of more than 6% during May, the S&P is little changed to begin the new month. US steel and aluminium shares gained after President Trump said he would double tariffs on imports. Trade tensions remain in focus after China and the US accused each other of violating their trade deal from last month and the European Union warned it may speed up retaliatory measures. Treasury yields rose, despite a weaker than expected manufacturing ISM report, and the US dollar is weaker against G10 currencies.

Crude oil prices climbed more than 2% despite the announcement over the weekend that OPEC+ has agreed to increase oil output for the third consecutive month. Supply will be increased by 411,000 barrels a day in July, the same as the preceding two months. Several OPEC+ countries are overproducing their quotas, and the additional supply is expected to test the resilience of the oil price.

The US ISM index edged down to 48.5, suggesting that factory activity contracted in May, for the third consecutive month. The index dipped marginally compared with the April reading and was below consensus estimates. The new orders and employment subindices remain weak, but the dip in the headline index was almost entirely related the fall in inventories, as companies respond to the hit from tariffs. The prices paid component remained elevated and is consistent with a pickup in core goods price inflation.

Federal Reserve Governor Waller said he continues to see a path towards interest rate cuts later this year. He expects tariffs will weaken the labour market and increase inflation in coming months, but favours looking through near term higher inflation, if expectations remain contained. Waller largely dismissed the recent increase in inflation expectations in consumer surveys and prefers market-based measures and professional forecasts.

The market trimmed Fed easing expectations at the margin. There is around 50bp of cuts priced compared with 55bp on Friday. US treasury yields moved higher across the curve. There was a brief dip after the ISM data, but this wasn’t sustained. The selloff was led by the longer end of the curve. 10-year yields are 7bp higher at 4.47% after ending last week at 4.40%, the lowest level since the middle of May.

US dollar weakness has been the key theme in currency markets. The dollar index failed to get any support from higher treasury yields and reached the overnight low after the weaker than expected ISM data. All the G10 currencies have made gains although the Canadian dollar has underperformed.

NZD/USD traded above 0.6000 to begin the week and made a fresh 2025 high just below 0.6040. The 0.6030/0.6040 region has formed the topside of the range on several occasions through the past six weeks. The NZD has been the strongest G10 currency since the open yesterday making gains on the major crosses. NZD/AUD is back towards the recent highs at 0.9290.

Curve flattening was the dominant theme for NZ fixed income, in the local session on Friday, ahead of the long weekend. 2-year swap rates declined 4bp to 3.29% while 10-year rates closed at 4.14%, 8bp lower. The 2y/10y curve, at 85bp, is the flattest since early April. The government curve largely matched the move in swaps with 10-year bonds closing last week at 4.57%.

Australian 10-year bond futures are 4bp higher in yield terms, since the NZ close on Friday which suggest an upward bias for NZGB yields on the open.

The only domestic economic data of note today is Q1 terms of trade. The Caixin manufacturing PMI is scheduled in China. The official manufacturing and service PMIs, which captured the initial period after the trade truce, were broadly stable and matched consensus expectations.

Eurozone CPI is expected to decelerate in May, supporting the case for a further 25bp rate cut, by the ECB this week. JOLTS job openings data will be in focus in the US ahead of the labour market report on Friday.