Market movements have been modest. Reports that the Iranian Navy is trying to assert its authority in the Strait of Hormuz have contributed to a 2% lift in oil prices. That move pushed up the US 10-year Treasury yield, following its earlier fall after the core PCE deflator came in lower than some feared. The USD broke its positive daily run and is broadly weaker, although moves have been modest. The NZD is slightly higher at 0.5650.
US inflation data were in line with consensus, with the core PCE deflator rising 0.3% m/m and 3.4% y/y in May, taking annual core inflation to its highest level since 2023 and further away from the Fed’s 2% target. The consensus was evenly split between 0.3% and 0.4%, so the outcome was lower than many had feared. Headline inflation was stronger at 4.1%, fuelled by gasoline prices. The recent plunge in oil prices means this was likely the peak in headline inflation, though not necessarily in core inflation. Of note, higher chip prices continue to feed through into broader inflation pressure, with Apple announcing significant and unprecedented price increases across its product range. For example, the price of the cheapest iPad will increase by 28.6%.
On the activity side, real personal spending rose 0.3% m/m in May, consistent with a pick-up in consumer spending in the current quarter, driven by higher-than-usual tax refunds. The third revision of Q1 GDP lifted the annualised growth rate to 2.1% from 1.6%, driven by a downward revision to imports. Private consumption was revised down to 0.5% from 1.4%, the smallest increase in four years, but Pantheon Macroeconomics estimates that it picked up to 2.0% in Q2
Initial jobless claims fell 11k last week to 215k, albeit likely influenced by the public holiday. Still, the data remain consistent with ongoing labour market resilience. The 4.5% m/m fall in durable goods orders in May was driven by lumpy aircraft orders, while the core figure, which excludes transportation, was much stronger than expected at 1.3% m/m and included upward revisions. Business investment continues to run hot, driven by the tech sector.
US Treasuries rallied following the data, with the focus on the core PCE deflator being not as strong as feared, although moves were modest. The 10-year rate traded down towards 4.36% before coming under upward pressure from higher oil prices (see below) and is currently 4.39%, down slightly from the NZ close. The 2-year rate is a couple of basis points lower at 4.12%. For a second day, market pricing for Fed rate hikes has been pared back, with “only” a cumulative 37bps now priced through to March next year.
Brent crude is up over 2% to above USD75. A UK maritime group reported that a vessel had been struck by an unknown projectile near the Omani coast. This followed warnings from the Iranian Navy that caused several ships to turn around while attempting to cross the Strait of Hormuz. The incident highlights the risks that remain in the area and Iran’s desire to exert control over the Strait. Meanwhile, the IDF said it struck Hezbollah operatives who posed a threat to its troops. Needless to say, the ceasefire remains fragile.
US equity markets show modest changes, with significant offsetting price movements. An earnings beat by Micron drove strong gains in semiconductor stocks, while Apple plunged after announcing its price increases.
Currency movements have been modest, but the USD has broken its positive post-FOMC daily run and is broadly weaker on the day. The NZD is slightly stronger at 0.5650 and, based on the price action over the past couple of days, one might tentatively conclude that 0.5630 is a support level, with the currency not falling below that mark despite selling pressure. The AUD has pushed back above 0.69 to reach 0.6915, while NZD/AUD is slightly weaker at 0.8170. Yesterday’s Australian labour market report was in line with consensus, with employment rising 40k in May, helping nudge the unemployment rate down to 4.4% after the previous month’s surprise jump to 4.5%.
JPY remains on the weak side of the ledger, although USD/JPY has yet to break above 162, after getting close. NZD/JPY is slightly higher overnight at 91.4.
Domestic rates largely followed global rates lower yesterday, with both NZGB and swap yields falling 2-4bps across the curve. This took the 10-year NZGB yield down to 4.34%, putting it on the verge of making a fresh low for the year. Despite historically low cross-market spreads, including NZ government rates sitting below US rates out to 10-year maturities, the weekly bond tenders continue to meet good demand.
On the economic calendar, there are only second-tier releases that should not trouble the market. NY Fed President Williams speaks this morning. We assume he is one of the FOMC members who believed policy could remain on hold this year.
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Jason Wong is the senior Markets Strategist at BNZ Markets.
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