Mixed headlines on the Middle East; oil up over 1%. US Treasuries little changed just under 4.7% ahead of key US CPI data tonight. RBA on hold with tightening bias as expected; net market reaction not material

The Northern Hemisphere summer doldrums remain firmly in place, with little news and market movements well contained.

Headlines on the Middle East situation have been mixed. Mediator Pakistan said the US and Iran were “close to some sort of arrangement” over the Strait of Hormuz, with signals over the past two to three days pointing toward peace. Iran said the Strait of Hormuz will remain shut until conditions are met. Meanwhile, the WSJ reported that US forces fired on a Panama-flagged ship that attempted to run the American blockade of Iranian ports, the first US strikes in several days. Oil prices have been choppy and Brent crude, after briefly trading above USD90 per barrel, is currently trading with a USD88 handle, up over 1% on the day.

US Treasury yields largely followed oil prices. The US 10-year rate rose to an overnight high of 4.73% as oil prices peaked near USD90, fell to a low of 4.67% as oil prices eased, and currently sits at 4.68%. Volatility has been constrained as traders await tonight’s key US CPI data.

Second-tier US data did not move the needle. US small business optimism rose in July to 99.8, its highest level in nearly a year, with broad-based increases across the components. This included a jump in net hiring plans to their highest level since October 2022, going against the grain of last week’s non-farm payrolls report, which showed job shedding. Existing home sales fell 1.7% m/m in July to a three-month low, within a trend that has been relatively flat over the past couple of years.

US equities opened higher but weakened through the afternoon session. The S&P 500 is currently down 0.3%, with a moderately larger fall in the Nasdaq. European equities were flat, with the Euro Stoxx 600 index little changed.

Currency movements have been insignificant overnight. In the low-volatility environment, the NZD has traded in a range of little more than 25 pips and is flat around 0.5880. The AUD is flat around 0.7055, with NZD/AUD also flat around 0.8030. A small fall in the AUD after the RBA’s policy update proved temporary, with the move retraced during Governor Bullock’s press conference.

As widely expected, the RBA left its policy rate at 4.35% and maintained a tightening bias. The Statement noted that “inflation is still too high” and that there were upside risks to its projections, which show inflation is not expected to return to the midpoint of the target range until late 2027. It also noted that the Board could increase the cash rate target further if upside risks materialise. Bullock said, “I think, personally, that it’s quite possible we might need to go, but we’ll wait and see.” The net market reaction to the update was small overall, with the market still pricing a better-than-even chance of one more hike this cycle.

In the domestic rates market, global forces placed upside pressure on rates. Swaps and NZGBs were marked up 1–2bps across the curve, slightly outperforming on a cross-market basis. The RBA update came after the NZ close, and there has been little net change in Australian bond futures since then.

On the economic calendar, US CPI inflation figures for July will be released tonight, and the data could trigger a market reaction if there is an upside or downside surprise. There is a strong consensus for a 0.2% m/m core CPI print, which would see the annual increase drop to 2.5%. If realised, that would not be seen as a smoking gun for a September Fed rate hike.

Jason Wong is the senior Markets Strategist at BNZ Markets.