US and Iran tit-for-tat military attacks increased. Crude rises through Friday night session, up 4½%; expect to see another lurch higher on the Asian open today, Rates and currencies well contained despite the lift in oil prices

Rates and currency markets showed well contained price movements to end last week, with more notable price action in oil markets and US equities.

US and Iran tit-for-tat military attacks increased in scale and scope through the week and that continued over the weekend.  This included US targeting southern Iranian cities as part of its attacks on logistics infrastructure, while Iran was spreading it attacks across multiple gulf nations, with strikes of water desalination and electricity plants in Kuwait, for example. Over the weekend, tensions have increased further, with US military deaths and injuries after Iran targeted a US base in Jordan. The NY Times reported the US was sending more warplanes to the Middle East, a signal of future US escalation in aerial attacks.

Oil prices rose steadily through the overnight Friday trading session, with Brent crude up 4½% and closing the week near its high for the day just over USD88 per barrel and taking its weekly gain to almost 16%. When the oil market reopens today, expect to see another lurch higher.

Despite the lift in oil prices, US Treasuries didn’t show much price movement, with the 10-year rate trading a tight 4bps range of 4.51-4.55% and closing at the top end of the range, little changed from the NZ close. The curve flattened, with the 2-year rate up 4bps to 4.18%. Cleveland Fed President Hammack said persistently high inflation is her bigger concern, echoing recent comments by her colleagues on the FOMC.

Second-tier economic data didn’t move the needle.  Housing starts bounced back strongly in June after a very weak May.  Building permits, which show less volatility, fell 3% in June. Industrial production rose 0.1% m/m in June, capping off a strong quarter where manufacturing production rose at an annualised pace of 4.7%, the strongest quarterly growth in over five years, with broadly based gains. US consumer sentiment rose nearly 5pts in June on the University of Michigan survey to 54.4.

Currency movements on Friday were insignificant.  The NZD traded a range of less than 25pips and ended just above 0.5840, capping off another week of gains in the wake of the RBNZ’s recent rate hike and supported by stronger data that followed. The AUD had another session where it struggled to sustain levels above 0.70 and it closed the week just above 0.6980. NZD/AUD closed up slightly at 0.8370.

The yen bounced after PM Takaichi flagged the importance encouraging household and the Government Pension Investment Fund to increase investment in Japanese financial assets, echoing the same comments by her Finance Minister recently. However, the movement quickly reversed and the yen reverted to its trading range and closed the week near 162.40.  NZD cross movements overall were minimal.

US equities ended last week on a weaker note, with the S&P500 falling 1% and the Nasdaq down 1.4%. While almost all sectors fell, getting investors’ attention was Chinese AI startup Moonshot revealing its Kimi K3 open-source model, with claims that it rivals some of the top US models. This raised concerns about competition in the AI sector and if companies have to access cheap Chinese AI models, then what is the future of the massive capex plans for companies linked to US AI models?

The domestic rates market ended the week on a quiet note. There was minimal movement in NZGB yields and swap rates closed up 1-3bps, with the 2-year rate at 3.62% and the 10-year rate at 4.35%. NZ monthly CPI figures didn’t change BNZ’s pick for Q2 CPI of 1.5% q/q and 4.1% y/y, with the quarterly data released tomorrow. All of the big four trading banks see upside risk relative to the RBNZ’s recent 3.9% estimate.

In the day ahead, NZ trade data and Canadian CPI data are released. After from tomorrow’s CPI print, there is no other domestic data of note. The ECB meets later in the week and is widely expected to keep policy on hold. Other key global economic releases include Australian labour market, CPIs for Japan and UK, and UK labour market data.  Flash global PMIs for July will also be released this week.

Jason Wong is the senior currency Strategist at BNZ Markets.