Oil prices surge as US sanctions Russia’s largest oil producers. US Treasury yields higher as the market looks ahead to the release of delayed US CPI data. Precious metal prices have stabilised after sharp declines earlier in the week

A surge in oil prices, after the US imposed additional sanctions on Russia, has contributed to higher treasury yields as the market looks ahead to CPI data this evening. The CPI report is the first major economic release since the government shutdown began. Risk sensitive assets are generally firmer. Equity indices in Asia and Europe closed higher and US equities are currently in positive territory. The AUD and NZD gained against the US dollar while moves in major currencies were modest.

The US has announced sanctions on Russia’s largest oil producers citing the lack of commitment by Russia to end the war in Ukraine. Taxes from the oil and gas industry account for close to a quarter of the Federal Budget. The news of new sanctions contributed to strong gains for oil prices with Brent crude approaching US$66 per barrel. The move will further complicate Russian supplies to the global market. Bloomberg reported exports to India are set to fall to near zero citing comments from senior refinery executives.

Gold prices have stabilised after the sharp decline earlier in the week. Spot prices increased close to 1% and are consolidating after the sharpest pull back in more than ten -years. The earlier fall was associated with outflows from gold-back exchange traded funds. Silver prices have also recovered, after seeing a similar sharp retracement, which saw prices decline 10% from the recent peak.

US treasury yields moved higher across the curve with a modest steepening bias. 2-year breakeven inflation has rebounded from a four-month low earlier in the week, aligned with the rebound in oil prices, which gained a further 6% after the new sanctions were announced. 10-year yields have increased 5bp to 4.0% having bounced off the 3.94% level twice in recent sessions. European bond markets closed higher in yield – 10-year bunds ended the session at 2.58%, up 2bp.

Although the US dollar was little changed on the major FX crosses, commodity currencies were the strongest performers in offshore trade. Higher oil prices supported the Norwegian Krone and the Australasian currencies also gained against the US dollar. The Canadian dollar was little changed despite higher energy prices as core retail sales undershot expectations. The market expects a further 25bp rate cut by the Bank of Canada next week.

NZD/USD traded above 0.5750 overnight and towards the top end of the choppy 0.5700 – 0.5760 range that has been in play in recent sessions. The NZD gained on the major crosses.

There were small moves for NZ fixed income in the local session yesterday. Yields closed 1 to 2bp higher across the swap curve, with a marginal steepening bias, as the market continues to consolidate near multi-month lows. The government curve matched the move in swaps. The weekly NZGB tender attracted decent demand from investors. There was NZ$1.8 billion of bids for the NZ$450 million bonds offered. Each of the three lines cleared more than 1bp below the prevailing mid-market levels. However, yields retraced higher after the auction.

Australian 10-year bond futures are 5bp higher in yield terms, compared with the local close yesterday, implying an upward bias for NZ rates on the open.

There is a deluge of international economic data to round out the week. The most impactful for financials markets is likely to be the delayed US CPI report for September. The consensus estimate is for a 0.3% monthly increase for the core measure. This would see the annual rate pickup to 3.1% from 2.9% in August. Advance PMIs are released for European countries and the US.

There is no domestic data of note. Reserve Bank of Australia (RBA) Governor Bullock is speaking and could provide some clarity on the trade-off between CPI and labour market developments. Market pricing implies close to a 65% chance of a 25bp cut at the 4 November RBA meeting. Q3 CPI data next week is the next major economic release.

Jason Wong is the Senior Markets Strategist at BNZ Markets.