US announces trade deal with Vietnam. S&P500 underpinned and trades to fresh record high. ADP private payrolls significantly undershoot expectations

The S&P remained well underpinned and recorded a new record high after President Trump announced a trade deal with Vietnam. European equities also gained with the Euro Stoxx index advancing 0.7%. UK gilts and the pound fell on fiscal concerns, which weighed on the long end of government bond markets, including US treasuries. Brent crude prices increased almost 2% to US$69, ahead of an OPEC+ meeting this weekend, which is likely to see an increase in production quotas.

The US has reached a trade agreement with Vietnam, which would lower its reciprocal tariff on exports to 20%, and charge a 40% tariff on goods that are transhipped through the country. It is one of the few deals made with trading partners ahead of end of the 90-day pause in reciprocal tariffs on July 9. The US has previously agreed frameworks with China and the UK. Separately, President Trump has ramped up pressure on Japan and cast doubt that the US would reach a deal.

ADP reported a 33K drop in private payrolls in June, well short of the 98k consensus estimate. However, the relationship with the official data has not been strong. For example, the ADP series was around 100k below the initial estimates of private non-farm payrolls in April and May. Although ADP has understated the official data recently, there isn’t a consistent historical pattern.

The soft ADP data contributed to a sharp rally in front end treasuries. 2-year yields dropped from 3.80% to 3.74% but subsequently rebounded to earlier levels. The curve steepened with longer maturities moving steadily higher, driven by investor concerns about fiscal deficits and supply, after a large sell-off in UK gilts. 10-year treasury yields increased 6bp to 4.30% and the 2y/10y curve rebounded to 51bp.

The UK gilt market came under pressure on signs of friction within the Labour government, and concerns about the fiscal backdrop, which has raised questions about Chancellor of the Exchequer Rachel Reeves’ future. Longer maturities were particularly weak with 30-year gilt yields increasing 19bp to 5.42%. This was the largest one-day rise in yields since the global bond market rout in April and revived memories of Liz Truss’s ill-fated 2022 ‘mini-Budget’.

In currency markets, the pound fell close to 0.7% against the US dollar and euro, set against the backdrop of otherwise relatively small moves in G10 currencies. An initial move higher in the US dollar faded and the dollar index is little changed from the local close yesterday. NZD/USD slipped towards 0.6050 overnight but has since recovered. The NZD is marginally softer on the major cross rates except for NZD/GBP.

There were modest moves in NZ fixed income in the local session yesterday. Swap rates were marked 1-2bp higher across the curve, largely reflecting offshore moves. There was a marginal upward bias for government bond yields as well. NZ Debt Management launched the tap of the NZGB May-2031 bond yesterday for pricing today. The total book size at the latest update is NZ$28.6 billion, and the margin over the NZGB May-30 has tightened from initial price guidance to +21bp.

Australian 10-year government bond futures are around 7bp higher in yield terms, since the local close yesterday, which points towards higher NZ yields on the open.

There is no domestic economic data in the day ahead though the Crown Financial Statements for the year ended May will be released. It is a busy evening for US data. The labour market report has been brought forward by a day on account of the July 4 public holiday. The consensus estimate for nonfarm payrolls is an increase of 110k, while the unemployment rate is expected to edge higher to 4.3%. The services ISM is scheduled with a move back into expansionary territory anticipated.