Surprise, surprise, Trump backs down on his plan for a 20% Hormuz toll; oil prices pare earlier gains. US CPI for June much softer than expected. NZD well supported after run of data and more hawkish RBNZ stance

During NZ trading hours, the US and Iran exchanged missile fire, with the US targeting military assets near the Strait of Hormuz and Iran targeting the US base in Bahrain. Overnight, President Trump unsurprisingly backed down from his plan to charge a 20% levy on cargo traversing the Strait of Hormuz, a policy that lasted less than 24 hours. This followed pushback from Gulf nation allies, with Trump instead claiming these nations would make trade and investment deals with the US.

Brent crude peaked above USD87.50 overnight and currently sits around USD85, paring its daily gain to 2% and leaving it around where it was at the NZ close. Also weighing on sentiment, the UAE said two of its tankers were struck in the Strait, while there were also reports of multiple explosions on Iran’s Qeshm Island.

US CPI data for June were much weaker than expected across all measures. A plunge in gasoline prices drove the CPI down 0.4% m/m, taking the annual rate to 3.5% from 4.2%. Core CPI was flat, and slightly negative on unrounded figures, taking the annual rate to 2.6% from 2.9%. Core goods prices fell 0.1% m/m, while the closely watched “super core” measure of services excluding housing and energy fell 0.2% m/m. Pantheon Macroeconomics noted deflationary impacts from lower tariffs and some negative effects from the World Cup, with pre-booking having boosted inflation in previous months. Inflation looks set to pick up as higher energy and computer hardware prices filter through supply chains.

Fed Chair Warsh testified before lawmakers and maintained a hawkish tone, reiterating his “resolute commitment to restoring price stability”. When asked about the June CPI outcome, he said some might say “mission accomplished”, but “that is not my view”. His assessment of the overall economy was upbeat, describing the labour market as broadly stable, with few signs of layoffs and solid nominal wage growth.

The softer US CPI print drove US Treasury yields lower, led by the short end of the curve, although the move faded somewhat after Warsh’s comments. After reaching an overnight low of 4.52%, the 10-year rate is currently 4.59%, down 2bps from the NZ close. The 2-year rate is 8bps lower from the NZ close. A July hike is now seen as unlikely, and Fed Funds rate pricing has fallen across the curve, with only 43bps of hikes now priced by March, down from 53bps yesterday.

US equities have been supported by lower rates and a rebound in tech stocks, as whippy price action in semiconductors continues. Notably, IBM plunged 25% as customers redirected their IT spending elsewhere, crimping its revenue. The S&P500 is up about ½% and the Nasdaq is up 1%.

The USD followed the move in Treasuries, with broad-based falls before some subsequent fading. The NZD has outperformed over the past 24 hours, with several factors going its way. The RBNZ’s hike last week, stronger data and a hawkish undertone to Conway’s speech yesterday (see below) have supported the NZD, with the move exacerbated by the closing of significant short positions built up after a long period in which shorting the NZD had been a profitable strategy. The NZD briefly pushed above 0.5840 overnight and currently sits just above 0.58, up about 1% from this time yesterday.

The AUD has also been one of the better performers overnight and is currently trading at 0.6975. The closing of significant short NZD/AUD positions has been clearly evident since the RBNZ’s hike. The cross reached a high of 0.8370 overnight and is now slightly lower than at the NZ close, at 0.8330. Most other key NZD crosses have pushed higher overnight, adding to yesterday’s gains.

Yesterday, Japan MoF Katayama floated the idea of adding government bonds to a tax-free investment programme for individuals. Viewed alongside her comments last week encouraging increased asset allocation toward Japanese assets, it appears she is deliberately trying to tilt the playing field toward investment in JGBs and the yen. Japan’s real exchange rate trading around its lowest level in more than forty years is a sign that policy has been mismanaged for some time and that a change in strategy is overdue. The BoJ’s actions, with government encouragement, have played a key role in where the market currently sits. Japan’s 10-year rate fell 7bps, adding to Friday’s significant fall.

China trade data featured blowout results for both exports and imports, alongside a near-record trade surplus of more than USD125b for June. The figures were boosted by AI-related exports and investment, as well as China’s dominance across many manufacturing categories. Its growing trade surplus and cheap currency are attracting increasing attention, with countries looking to impose trade barriers and diversify away from China.

RBNZ Chief Economist Conway’s speech yesterday on inflation noted that, given Middle East developments, there was already upside risk to the Bank’s central forecast prepared last week. He ended his speech by saying, “if inflation pressures stemming from the Middle East conflict prove to be more persistent than expected, we will respond. Because when expectations become embedded in price-setting behaviour, bringing inflation back to target becomes much more difficult and costly.”

The key message from the QSBO was one of strengthening inflationary pressure, evident across both cost and pricing intentions. Furthermore, the “sales as a major constraint” indicator continues to ease and is more consistent with an output gap estimate closer to zero than the deeply negative estimate currently assumed by the RBNZ. Labour market indicators are on the slightly easier side of neutral, but not significantly so.

The defining feature of the domestic rates market remains a scramble to close received positions in the swaps market, as the turn in the data and the start of a clear tightening cycle have shifted market sentiment. Moves yesterday were exacerbated by payside pressure to hedge flows associated with investment in the government’s new 2038 bond issue.

The 2-year swap rate rose as high as 3.72% before closing up 9bps at 3.70%, breaching the highs reached earlier in the year. That milestone was not reached for 5- and 10-year swap rates, although yields still rose 11bps to 4.03% and 9bps to 4.36%, respectively.

The syndication of the new 2038 bond can be deemed a success, with NZDM issuing the maximum amount sought of $7b and pricing at the tight end of the range, 6bps over the 2037 bond. The final order book was over $26.7b. NZGB yields did not rise as much as swaps, with the 10-year rate closing up only 5bps at 4.66%.

In the day ahead, soon after we go to print, BoE Governor Bailey will speak at the annual Mansion House address. NZ card spending, China Q2 GDP and June activity indicators will also be released. Tonight brings US PPI data, a speech by NY Fed President Williams, and another session for Fed Chair Warsh in front of lawmakers. The Bank of Canada meets, with little chance seen of any policy adjustment.

Jason Wong is the senior currency Strategist at BNZ Markets.