Large swings in oil prices amid conflicting reports on US-Iran negotiations. Major equity markets little changed. Weak labour market data in Australia

US equities lacked a clear directional bias as investors assessed the likelihood of a diplomatic solution to the Middle East conflict. The S&P was close to flat in afternoon trading, while key European indices posted only small net moves. Tehran is reportedly responding to a US proposal that, according to an Iranian news agency, “has narrowed the gaps to some extent”. Treasury yields were modestly lower across the curve, while initial gains in the US dollar faded.

Oil prices were volatile overnight. Brent rose almost US$5 from a low near US$104 after Reuters reported that Iran’s Supreme Leader said enriched uranium must remain in Iran. The move quickly reversed, however, as conflicting reports emerged and prices returned to pre-spike levels. Separately, the CEO of Abu Dhabi National Oil Company highlighted ongoing strains in energy markets, noting that even if the Iran conflict ended immediately, Middle East oil flows would not fully recover until well into 2027.

The US composite PMI was little changed in May at 51.7, suggesting growth has so far remained resilient in the face of the energy shock. The services PMI edged down to 50.9 from 51.0, while the manufacturing PMI rose to 55.3 from 54.5. US jobless claims were near expectations, reaffirming a benign picture for the labour market. In the UK and euro area, manufacturing PMIs were close to expectations, but services readings were weaker than expected.

Treasury price action closely tracked moves in oil. Yields initially moved higher as oil rallied, before retracing as energy prices reversed. Two-year yields rose nearly 6bp at the peak before fully unwinding the move. The curve flattened, with the long end outperforming, and 10-year yields were last 2bp lower at 4.56%. There were only small net moves across European sovereign bond markets.

The US dollar was little changed on the major crosses in offshore trading. The dollar index moved higher alongside yields and oil before retracing. The Australasian currencies outperformed, with the AUD the strongest performer following a decline after weak employment data released earlier in the day. Meanwhile, the NZD was marginally firmer against the US dollar relative to the local close and gained on the key crosses, except against the AUD.

Australian labour market data for April was surprisingly weak. Employment fell 18k and the unemployment rate rose to 4.5%, the highest since November 2021. This compares with the RBA’s forecast that unemployment will average 4.2% in Q2. While noting the month-to-month volatility, the report points to a faster-than-expected cooling in the labour market. The AUD dropped immediately afterwards as the market pared expectations for RBA tightening.

NZ rates traded lower and flatter in the local session yesterday, largely reflecting moves in offshore markets. Two-year rates fell 7bp to 3.57%, while 10-year rates fell 11bp to 4.35%. Swaps modestly outperformed government bonds ahead of the weekly tender. Ten-year MMS spreads widened to +37bp, although remaining within the well-established +30 to +40bp range that has held for several months.

The weekly government bond tender took place against the backdrop of an 8–9bp rally, with yields near session lows following the weak Australian labour market data. The rally appeared to impact demand. Cover ratios were below typical levels with NZ Debt Management receiving NZ$1.1bn in bids for the NZ$450m offered across the benchmark 5- and 10-year lines. Separately, Rentenbank issued a NZ$850m 5-year Kauri at mid-swap +28bp.

Retail trade for Q1 is released today. We expect ex-autos sales rose 0.8% in real terms. However, momentum is likely to moderate sharply into Q2 and Q3, reflecting the impact of the conflict. Japan CPI for April will also be in focus, with markets pricing close to an 80% chance of a 25bp BoJ hike in June. Board member Junko Koeda signalled support for further tightening, citing inflation pressures. Germany’s Ifo survey is due, while retail sales data are released in the UK and Canada.

Stuart Ritson is a senior Markets Strategist at BNZ Markets.