Market conditions are relatively calm with only modest price action, with a lack of newsflow and the investors believing that the war between Iran and Israel is largely over for now.
The Iran-Israel ceasefire still seems to be holding, and President Trump said he would hold a meeting with Iran next week. He questioned whether a new nuclear deal was necessary, again claiming that Iran’s nuclear facilities were obliterated, despite a leaked US intelligence document saying that the bombing only delayed Iran’s ambition to develop nuclear weapons by a few months. The Defence Intelligence Agency said the report was a preliminary, low confidence assessment, not a final conclusion.
NATO members pledged to meet President Trump’s demand to increase defence spending to 5% of GDP by 2035, which Trump called “tremendous”. While the target is still a decade away, the move to effectively double defence spending will put pressure on each country’s fiscal accounts – meaning spending cuts elsewhere at a time when there are already upside pressures to spending on health and pensions, or higher taxes. On a sidenote, Spain looked to be an outlier, refusing to meet the 5% target, with Trump threatening to make them pay via a trade deal, although it’s not clear how that’s possible with Spain part of the EU trading bloc.
Fed Chair Powell faced a second session of questioning by lawmakers. He reiterated prior messages, including that “there will be some inflation from tariffs coming...not yet, but over the course of the coming months…we’re just waiting to see more data on that”. He reiterated that most FOMC members support cutting rates this year, while adding that it is possible that tariffs won’t increase inflation by much.
While the market sees only a small chance of a rate cut at the next meeting in late-July, with 6bps of cuts priced, a full rate cut is now priced by the following meeting in September, for the first time in six weeks.
The economic calendar has been light, but US new home sales plunged 13.7% m/m in May to a seven-month low. The data can be volatile and prone to large revisions, but the softer print is consistent with other housing market data highlighting a challenging backdrop for the market in the face of poor affordability and rising inventories.
US Treasury yields show insignificant net movements for the day and a small curve steepening bias. The 10-year rate currently sits at 4.30%, little changed from the NZ close.
In equity markets, the Nasdaq 100 index is probing fresh record highs, with Nvidia trading up nearly 4% and at a record high. The S&P500 index is currently flat for the day.
Net currency movements have been modest. Overnight, the NZD has traded less than a 30pip range and it currently sits just under 0.6040, solidifying its recovery back over 0.60. The AUD has been oscillating around the 0.65 mark. NZD/AUD nudged higher yesterday after weaker than expected monthly Australian CPI data yesterday, with the cross rate currently at 0.9275. The monthly CPI indicator fell to 2.1% y/y, with the trimmed mean measure down to 2.4% y/y, the lowest rate since November 2021. The data solidified market expectations for another 25bps rate cut next month, now close to being fully priced.
Relative to this time yesterday, all key NZD crosses are higher, although NZD/EUR and NZD/GBP have nudged down overnight as EUR/USD and GBP/USD have traded at fresh 2025 highs for the year, close to 1.1660 and 1.3660 respectively. The biggest mover in NZD crosses has been a gain in NZD/JPY to 87.7. The yen has been the weakest of the majors for the day, solidifying its position as the worst performer this month. The market sees only roughly even odds of another BoJ rate hike this year despite higher inflation, with lower real rates providing no support to the yen.
Domestic rates were lower across the curve yesterday, driven mostly by global forces, with both swaps and NZGB yields down 4-5bps.
In the day ahead there are only second-tier data releases, including US trade, durable goods orders, jobless claims and pending home sales data.
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