
US treasuries extended the recent rally, supported by benign producer price data, and solid demand from investors at the 30-year auction. Lower yields contributed to a further fall in the US dollar which reached a multi-year low. Moves in US equity markets were relatively subdued. The S&P rebounded from an earlier loss and is little changed while the Euro Stoxx declined 0.6%. Gold advanced 2% to US$3386 per troy ounce. Brent crude traded above US$70 on geopolitical tensions.
Following the downside surprise to CPI, US producer prices were also weaker than expected in May and revealed little immediate impact from the tariffs. Core PPI increased by 0.1%, below the 0.3% consensus, which took the annual rate to 3.0%. Producer prices provide about one-third of the underlying data for the PCE deflator, the Federal Reserve’s preferred inflation gauge, which is forecast to have risen 0.1% in May.
US weekly jobless claims remained elevated at 248k. The four-week moving average rose to the highest level since August 2023, and continuing claims rose to 1.96 million, the most since the end of 2021. The data is consistent with a gradual deterioration in the labour market.
Treasury yields declined after the softer than expected data with the market pricing slightly more than two 25bp rate cuts from the Fed this year. 10-year yields dropped 6bp to 4.36%. The US$22 billion 30-year auction was closely monitored given recent weakness in the long end of global bond markets. The auction saw solid demand, and cleared 1.5bp below prevailing market rates, despite the lower yields.
Monthly activity data was weaker than expected in the UK. GDP fell by 0.3% in April, below expectations for a 0.1% contraction. Although the monthly GDP print can be noisy, the market has reverted to fully pricing 50bp of easing for the Bank of England by December. Gilts rallied with yields 5-8bp lower across the curve.
The US dollar declined against G10 currencies during Asian trade yesterday, as worries over US tariffs increased, after President Trump said he would notify trading partners of unilateral levy rates within two weeks. The move lower continued overnight with the dollar index falling below the level it reached in early April. The weakness in the dollar pushed the euro to its highest level since 2021. The pound underperformed following the soft GDP data.
After dipping towards 0.6010 in early European trade, NZD/USD traded higher aligned with the broader US dollar weakness and is back towards the top of the recent trading range. The NZD is firmer against the pound and yen, but little changed against the euro and AUD since the local close yesterday.
NZ electronic card transaction increased 0.3% in May, after four consecutive monthly declines, but the underlying trend remains weak. Total transactions have only increased 0.3% compared with a year ago and have fallen on an inflation-adjusted and per capita basis.
NZ swaps rates were little changed in the local session yesterday while the government bonds rallied with the curve flattening. 10-year bonds moved steadily lower in yield and closed at 4.57%, 5bp lower on the day. Australian 10-year bond futures are 4bp lower in yield terms, since the NZ close yesterday, which suggests a downward bias for NZGB yields on the open.
The weekly NZ government bond tender attracted decent demand from investors. There was a total of NZ$1.7 billion of bids for the NZ$450 million of nominal bonds being offered. Both lines cleared below the prevailing market mid-rates. The small parcel of linkers – NZ$25 million of the Sep-2030 line – was also well absorbed. Inflation-index-bond tender volumes have picked up this fiscal year though still represent a small fraction of total issuance.
It is a relatively quiet day ahead on the economic calendar. The only NZ release of note is the manufacturing PMI for May. This indicator has steadily improved in recent months and reached the highest level in nearly three years in April. A modest recovery is expected in the University of Michigan consumer confidence from very depressed levels. However, the extreme divergence in responses based on a respondent’s political affiliation, is creating significant noise in this series.
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