US equities show a modest fall, weakening after a poor ISM services survey but the impact on Treasuries and the USD was minimal. US Treasury yields are slightly higher led by the short end, while the USD is flat for the day. The NZD is close to 0.59, as it was this time yesterday.
The ISM services survey for July had a stagflationary vibe, with the headline index slipping less than a point to 50.1, against expectations for a modest lift, with new orders down to 50.3 and the employment index falling deeper into contractionary territory, at 46.4. Meanwhile, the prices paid index rose 2.4pts to a 30-month high of 69.9. The data plays to the view that US inflation will remain sticky and economic growth momentum is weakening, as was clearly evident in last week’s data releases, including GDP figures for those willing to look past the headline bounce.
Earlier, in stark contrast, the competing S&P Global services PMI was revised up half a point to 55.7, although this survey is less regarded as it has a fraction of the sample size of the ISM survey and doesn’t cover all service sectors.
The full trade report showed the US fiscal deficit narrowing to $60.2b in June. Combining the data with tariff revenue, the average effective tariff rate leapt to 8%, from an average of about 2% last year. Estimates suggest that the average tariff rate will leap further to 18%, although these calculations are done on a pre-substitution basis. As trade gets re-routed and consumers switch to cheaper goods, the average tariff rate will rise to less than that, although the full gamut of tariffs has yet to be announced, particularly sector-specific tariffs.
On that note, in an interview with CNBC President Trump made a number of soundbites regarding tariffs. He said he will unveil new tariffs on semiconductors and chips within the next week or so. Planned tariffs on pharmaceuticals could eventually reach up to 250% (higher than the 200% rate previously referenced), after initially imposing a “small tariff”.
Regarding country tariffs, he said he’ll be raising India’s tariff over the next 24 hours, “very substantially” higher than the 25% tariff previously flagged as it continues to purchase Russian oil. The tariff on the EU will lift to 35% if it fails to meet its agreed $600b worth of investment obligations. On a more positive note, he said he was “getting very close to a deal” with China to extend the trade truce due to expire on 12-August.
In terms of appointment of the next Fed Governor, Trump said there were four good candidates he was considering, naming former Fed Governor Warsh and National Economic Council Director Hassett as being on the short-list. Treasury Secretary Bessent was ruled out as he was happy to remain in his current role.
For US Treasuries, the US data had little impact on the market, with more focus on supply conditions. There was poor demand at the auction for $58b of 3-year notes, which went for 2bps higher than prevailing yields. In the next two days the market will need to absorb $42b of 10-year notes and $25b of 30-year notes as well as a record-setting $100b of 4-week bills. The 2-year rate is up 4bps for the day to 3.72% while the 10-year rate is up less than 1bp to 4.20%.
Net currency movements have been insignificant across most of the majors. The yen has been the largest mover, with USD/JPY up 0.4% to 147.65 and NZD/JPY up modestly to just over 87, but other changes in currencies have been minimal. NZD/USD continues to languish around 0.59 and the NZD is marginally weaker on most of the key crosses, including NZD/EUR slipping below 0.51 and NZD/AUD approaching 0.91. The NZD has struggled since Trump imposed a 15% tariff on NZ, making NZ lose its competitive edge compared to some competing trading partners, and there might also be some caution ahead of this morning’s labour market data, which are expected to be soft.
Yesterday, China’s S&P Global PMI services index (previously sponsored by Caixin), rose 2 full points o 52.6, its highest level since May last year, painting a more positive economic picture than the official version, which covers both service and construction sectors. There was little market reaction to the news.
The domestic rates market extended the run of falling yields, supported by global forces, with NZGB yields down 4-6bps and swap rates down 4-5bps. The 2-year swap rate closed at 3.06%, falling towards the 3.03% closing low of early April. Rates at the longer end of the curve are also probing multi-month lows. The OIS market prices in two full rate cuts that would take the OCR down to 2.75%.
In the day ahead the domestic focus will be on the various NZ labour market reports. The consensus sees a small fall in employment for Q2, supporting a lift in the unemployment rate to a nine-year high of 5.3%. Expectations look like a re-run of a quarter ago, when the market expected the same, although in that case the unemployment rate was recorded as flat, at 5.1%. Elsewhere, Japan wage data will be of some interest, while the global calendar is light tonight.
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