Benign US PPI data supported lower US rates and helped US equities reach a fresh record high. Currency markets remain moribund. The NZD reversed the decline that followed yesterday’s RBNZ survey of expectations.
US PPI inflation data were broadly in line with consensus, after accounting for revisions, and showed an easing in inflation pressure. The headline measure was flat in July, seeing the annual increase fall from 5.5% to 4.7%. The core measure rose 0.2% m/m, taking the annual increase down to 4.2% from 4.7%. Despite the benign result, Pantheon Macroeconomics revised up its estimate of the core PCE deflator for the month from 0.16% to 0.24%, not helped by the 5.6% jump in PPI portfolio management fees. However, forthcoming methodology changes to the calculation of this component, and others, will soon result in a 0.2pp downward revision to annual core PCE inflation, so this is unlikely to trouble the Fed.
Despite the 9k lift in initial jobless claims last week to 209k, the figures remain historically low and the four-week average, which smooths out volatility, was just 199k. The figures remain consistent with a low-firing labour market environment and, as last week’s employment report showed, also a low-hiring one.
Recent benign inflation figures haven’t swayed Cleveland Fed President Hammock’s view on policy. She was one of three FOMC members who dissented in favour of a hike at the last policy meeting, and she said she didn’t have confidence that inflation would fall enough to return to the 2% target. She added, “I think we need to act now”, saying rates were not meaningfully restricting the economy and that it could take “some number” of adjustments to bring inflation back to target. Richmond Fed President Barkin, a non-voter this year, said much of today’s elevated inflation has come from shocks that should pass, but supply-chain challenges and the AI investment boom could generate more persistent price pressures, which might argue that more help is required to bring inflation back down to target.
The benign PPI data supported a move lower in US rates across the curve, with the market pricing just 9bps of hikes for September and 23bps for the year, down from 27bps. The 10-year rate fell to a low of 4.61% before lifting to the current level of 4.63%, down 4bps from the NZ close. The Treasury successfully issued $25b of 30-year notes at a rate of 5.216%, the highest yield in a quarter of a century, reflecting the lift in rates since the previous auction.
The stalemate in the Middle East continues, with the US approach focused on applying economic pain rather than military action, raising the prospect of a drawn-out process. The US is counting on Iran eventually capitulating as funds run dry, while Iran is counting on dwindling oil supplies ultimately driving up oil prices and pushing the US into a deal. Breaking of string of daily price gains, oil prices fell overnight, with Brent crude falling towards USD86 per barrel.
US equities are on track for another record close, with the S&P 500 index up 0.6% in late-afternoon trading, supported by the backdrop of lower US rates. The Nasdaq index is up 0.9%. The Euro Stoxx 600 index closed flat.
UK Q2 GDP was in line with expectations at 0.4% q/q. The BoE’s chief economist Pill, who has been voting for higher rates and has been outnumbered on the MPC, said the figure was reassuring in showing that the UK was not entering a sharp downturn and supported his policy view, against the backdrop of inflation running above target. There was little market reaction to the data.
Bloomberg reported that Japan’s PM Takaichi is supportive of a near-term rate hike by the BoJ, with the next move likely in either September or October, according to sources. This reflects the BoJ’s concerns over yen weakness driving up inflation and the government’s desire to strengthen the impact of the recent US-Japan currency intervention. JGB yields nudged up across the curve. The market sees a September hike as more likely than the BoJ waiting until October. The positive impact of the report on the yen was only temporary, and USD/JPY is currently around 159.50.
Net currency movements remain insignificant in the current low-volatility environment. The NZD faced some selling pressure after the RBNZ’s survey of expectations yesterday afternoon (see below), but the move reversed overnight and NZD/USD is trading around 0.5850, from a low just above 0.5820. As a result, NZD crosses are all slightly stronger overnight, but slightly lower compared with this time yesterday. The AUD is steady at 0.7060, while NZD/AUD is little changed around 0.8290, after briefly dipping below 0.8265.
In the domestic rates market, the reaction to the RBNZ’s survey of expectations, based on 38 respondents, looked overdone. The survey reported higher wage expectations, higher house price expectations and higher long-term inflation expectations, but traders latched onto the fall in one-year and two-year inflation expectations, the latter from 2.53% to 2.34%. This appeared to be explained by the fall in oil and fuel prices, given the timing of the quarterly survey. The survey revealed more about market positioning and the disposition of hedge funds than it provided any clear guidance on the appropriate monetary policy response.
OIS rates fell, more so for the dated meetings, and the earlier fall in swap rates extended. By the close, swap rates were down 5–6bps across the curve for the day, taking the two-year rate to 3.59% and the 10-year rate to 4.34%. This spilled over into the bond market, with NZGB yields down 4–6bps across the curve. The market still prices a high chance of a September hike, while the following expected 25bps move is split between the October and December meetings.
In the day ahead, NZ’s manufacturing PMI is released and, after the massive surge to 59.7 in June, some pullback would not surprise. Anything in the mid-50s would suggest there is genuine momentum in the sector. RBA Governor Bullock will face lawmakers this morning, justifying the policy stance against a backdrop of sticky, elevated inflation. Tonight sees the release of US retail sales, where a soft reading is expected, followed by the University of Michigan’s consumer survey.
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Jason Wong is the senior Markets Strategist at BNZ Markets.
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