The US ISM manufacturing index makes a strong recovery. Markets settle after volatile open to the week; US Treasury yields push higher. Oil prices plunge nearly 5%

The Asian trading session kicked off in a volatile fashion, with gold and silver prices collapsing further, S&P500 futures opened on a weak note and the NZD dived below 0.60.  This followed the choppy trading session on Friday following Trump’s pick of Kevin Warsh as the next Fed Chair.

In overnight trading, gold and silver fell to fresh lows before showing decent bounces, US equities are on a much better footing, US Treasury yields have pushed higher and the USD is modestly stronger, with moves extended following a stronger than expected US ISM manufacturing survey.

The ISM manufacturing composite rose a chunky 4.7pts to 52.6, its strongest level in over three years and well ahead of consensus estimates for a small rise.  A range of components of the index were strong, with new orders rising almost 10pts to 57.1 and solid gains in production and employment.  On a more cautious note, the report noted the positive signs for the start of the year were tempered by commentary citing that January is a reorder month after the holidays and some buying appears to be to get ahead of expected prices increase due to tariffs. The prices paid index pushed up to a four-month high of 59.0.

After opening down, the S&P500 has recovered and is up 0.7% in early afternoon trading.  European equities were stronger, with the Euro Stoxx 600 index closing up 1%.

US Treasury yields are up 3bps across the curve since Friday’s close, with a nudge higher after the ISM report.  After trading at an overnight low of 4.21%, the 10-year rate currently trades at 4.26%.

The USD is broadly stronger from the weekend close, adding to Friday’s gain after Warsh got the nod as the next Fed Chair. CHF has been the worst performing losing about 1%, reflecting the shift away from the dollar-debasement trade, with Warsh seen as a credible pick and one who is likely to defend the independence of the Fed. EUR has declined to the 1.18 mark.

JPY is on the softer side as well. Japan PM Takaichi said on Saturday that the weaker yen can be a huge opportunity for export industries, hardly comments that were conducive to intervening in the market to quell speculative yen selling pressure. While she tried to row back that comment, it was in vain, and USD/JPY has pushed up to 155.50.  Following Friday’s report that there was no official intervention when USD/JPY was trading up towards 160, some speculators might be willing to reload short yen positions in anticipation of a retest of that level.

The NZD has been oscillating, with a few unsuccessful attempts to fall below 0.5990, where there has been some support.  It currently trades just over the 0.60 mark.  AUD has been on the stronger side of the ledger, seeing NZD/AUD drift down, while the NZD is mostly higher on the other key crosses overnight.

Oil prices plunged with Brent crude down nearly 5% to USD66 per barrel.  President Trump said he’s hopeful “we’ll make a deal” with Iran, playing down Supreme Leader Khamenei’s weekend threat to strike back forcefully following any attack. OPEC+ ratified its plan to keep production steady in March, despite the strength in prices through January, but kept open its options for Q2.

Trading in gold and silver has been wild, with falls exaggerated by some forced selling as speculators got caught on Friday by the massive downdraft. After trading towards a low around USD4400, spot gold is currently USD4680.

In the domestic rates market there was a bias to slightly higher rates, with swaps up 1-3bps across the curve and NZGB yields up 1-2bps. The Australian 10-year bond future has traded an 8bps range overnight, but the net move from the NZ close is little changed.

In the day ahead, the NZ/Australian focus will be on the RBA meeting this afternoon.  Around three-quarters of 33 economists surveyed by Bloomberg expect a 25bps lift in the cash rate to 3.85% and the market prices about a 75% chance – so a rate hike is not seen as a sure thing, but given a high chance.  A rate hike would see the RBA become the first major central bank to tighten policy this cycle.

The new partial US government shutdown is again affecting data releases.  The US JOLTs report will no longer be released tonight and the January jobs report (due Friday) will also be delayed. The dates for rescheduled releases will be provided once funding is restored. There is some hope, but no guarantee, that the current government shutdown will be resolved soon with a vote in the House on a new funding bill.

Stuart Ritson is a Markets Strategist at BNZ Markets.