Oil prices continue to fall. Lower oil prices pull down global rates. USD continues to strengthen, building on the gains since the Fed's hawkish hold last week. Other major currencies probe fresh lows

Although newsflow has been light, it is hard to ignore the ongoing impact of last week’s hawkish Fed pivot, combined with improved sentiment around the Middle East conflict as oil now flows freely through the Strait of Hormuz. The net result has been USD strength, with the DXY index rising every day since last week’s FOMC update and now trading at a 13-month high above 101.5.

These forces have seen a range of big figures broken and notable milestones reached, including major currencies trading at fresh multi-month lows or lows not seen in more than a year (for example, EUR below 1.1350, AUD below 0.69 and Bitcoin below USD60k), alongside weaker commodity prices (gold below USD4000, silver below USD60, WTI oil below USD70 and Brent crude below USD75).

Treasury Secretary Bessent’s speech to the Economic Club of New York yesterday is widely seen as giving the Presidential blessing for the Fed Chair to act independently and nudge rates higher if required. In a subsequent televised interview, Bessent spoke favourably of the 1997 episode when Greenspan engineered a “one tap-on-the-brakes rate hike” that did not derail the economic expansion.

The market now fully prices a Fed hike by October and 41bps of hikes by March, the peak in rate pricing, representing a further paring from earlier in the week. However, another notable fall in oil prices may well be the bigger factor driving US Treasury yields lower, led by the long end. The 10-year rate is down 10bps on the day to 4.40%, compared with a 6bps fall in the 2-year rate to 4.14%. European yields also fell notably, albeit to a slightly lesser extent.

US new home sales fell by a much larger-than-expected 7.3% m/m in May, but the release had little market impact, with most of the fall in rates preceding the data and the series subject to heavy revision. The drop in sales activity came despite heavy discounting to clear inventory, with high mortgage rates clearly weighing on the market as the average mortgage rate recently rose to a nine-month high.

The ongoing fall in oil prices, including another 4% drop on the day, reflects improved sentiment as oil is now gushing through the Strait of Hormuz, supported by a step-up in shipping activity. The International Maritime Organisation said it had received safety guarantees allowing hundreds of ships to exit the Persian Gulf. The prospect of increased oil flows has offset concerns about very low inventory levels, with EIA data showing US domestic crude inventories at Cushing plunging to their lowest level since 1984 and approaching “tank bottoms” — the point below which the hub can struggle to operate efficiently.

Oil inventories around the world will need to be significantly rebuilt, raising the question of how much further prices can fall. For reference, Brent crude is currently trading with a USD73 handle, only modestly above the USD72.50 level seen just ahead of the missile strikes at the end of February, but still notably above the USD60 mark that preceded the build-up of US military assets in the Middle East.

Equities show only modest changes. Energy and IT stocks are weighing on the major US indices. In late-afternoon trading, the S&P500 is slightly lower, the Nasdaq is down modestly, and the Dow Jones index is modestly higher. The Euro Stoxx 600 index closed up less than 0.1%. It was a less chaotic session in Asia, with Korea’s Kospi rebounding more than 3% while Japan’s Nikkei index fell 0.9%.

Expanding on our earlier currency comments, the USD is broadly stronger, while the NZD and AUD remain near the bottom of the leaderboard for another day and overnight session. The NZD found some support just above 0.5630, while the AUD fell below 0.6885. For both currencies, the 14-day technical RSI is well below 30, providing a short-term “oversold” signal, while the DXY index is signalling “overbought”. NZD/AUD has been trading a little below 0.82, while the NZD shows modest falls on the other major crosses.

Australian CPI data for May were mixed, with annual headline inflation three-tenths softer than expected, falling to 4.0% y/y, while the trimmed mean measure was one-tenth stronger than expected, rising to a fresh high of 3.6% y/y. The market reaction was muted.

It was another quiet day in the domestic rates market, with further modest outperformance on a cross-market basis. NZGB yields fell 3-4bps across the curve. Of note, NZDM did not announce an imminent syndication of 2038 bonds at its weekly Wednesday morning tender update, although that does not necessarily rule out a July issuance date. Swap rates fell 2-3bps. Lower global rates overnight have seen the Australian 10-year bond future down 5bps in yield terms since the NZ close, suggesting further downside potential for NZ rates on the open.

On the economic calendar, Australian labour market data will be released this afternoon, with the consensus expecting the unemployment rate to slip to 4.4%. In the US tonight, the core PCE deflator is expected to rise 0.3% m/m, lifting the annual increase to 3.4% y/y and moving further away from target. US personal spending data, durable goods orders and jobless claims round out the calendar.

Jason Wong is the senior Markets Strategist at BNZ Markets.