US equities ended July on a firmer note, with the S&P 500 up 0.7%. The yen gained after rate checks by the NY Fed, & coordination between US and Japanese authorities. US Treasury yields extended their recent rise, led by the long end of the curve

US equities ended July on a positive but volatile note, with the S&P closing 0.7% higher after large intraday swings. Global bond yields rose, led by further weakness at the long end of the US Treasury curve extending the move from after the FOMC. The yen remained in focus amid increased coordination between Japanese and US authorities to provide support, while the NZD reached its highest level in several weeks. Brent crude rebounded above US$90 per barrel. Over the weekend President Trump said he held off delivering new strikes against Iran while discussions are underway about reopening the Strait of Hormuz.

Three Fed officials who dissented in favour of a hike at last week’s FOMC warned that waiting too long to act against inflation could risk the need for even more aggressive moves later. Cleveland Fed President Beth Hammack, Minneapolis Fed President Neel Kashkari and Dallas Fed President Lorie Logan argued that, even if recent price pressures stemmed from temporary shocks such as tariffs and the Iran war, inflation is unlikely to return sustainably to the Fed’s 2% target without higher rates.

US Treasuries remained under pressure, with intermediate and longer maturities continuing to underperform and the curve steepening further. The 10-year yield reached 4.74%, its highest level this year, while the long bond extended to 5.27%, its highest since 2007. There was no clear single catalyst, though a firmer-than-expected Q2 employment cost index, hawkish Fed commentary and higher oil prices all weighed on sentiment.

European government bond yields also moved higher after inflation data reinforced the case for another ECB rate hike. Headline inflation rose to 2.9%, in line with expectations, reflecting higher energy prices in the second half of July. Core inflation edged up to 2.5%. Markets are close to fully pricing a 25bp September hike and around 40bp of tightening by year-end.

The Bank of Japan left rates unchanged at 1%, in line with analysts’ expectations, with one dissenting vote on the nine-member board in favour of a hike. The central bank retained a tightening bias, noting that CPI risks remain skewed to the upside and continuing to flag the risk that underlying inflation overshoots its 2% target. It revised its inflation forecast lower to 2.5% from 2.8%, reflecting the impact of government subsidies, while projecting the economy to grow 0.6% this fiscal year.

The yen initially found little support from the expected BoJ decision, having already retraced around half of its intervention-driven gains against the USD. It strengthened into the weekly close, however, with markets alert to further intervention after a series of New York Fed rate checks and reports that US authorities had told banks they may transact to support the yen. USD/JPY ended the week below 157.50. However, a sustained yen appreciation is likely to require tighter BoJ policy, with FX intervention alone only able to provide temporary support.

Outside of the yen, net moves across G10 currencies were modest. Initial gains for the US dollar faded. The NZD dipped towards 0.5850 before rebounding sharply to an intra-day peak near 0.5890, the highest level in almost two months. NZD/JPY fell below 93.00.

NZ fixed income rallied on Friday with a flattening bias. The market looked through another strong lift in consumer confidence, despite the OCR increase during the month and higher fuel prices. Two-year rates closed 3bp lower at 3.68%, while 10-year rates fell 4bp to 4.38%. Government bonds outperformed on month-end demand as the new May-2038 line entered major benchmarks. Ten-year NZGB yields fell 6bp to 4.76%, with swap spreads dipping back towards the base of the recent range at +30bp.

Building permits for June are the only domestic release of note today. China’s RatingDog PMI will be watched after the official manufacturing and services PMIs both dipped below 50, pointing to softer momentum in July. In the US, the manufacturing ISM is expected to remain consistent with solid activity.

Stuart Ritson is a senior Strategist at BNZ Markets.