US economic data in line with expectations. US rates and USD push higher, with Fed rate hike later this year fully priced. Stronger Australian CPI data raises the chance of the RBA delivering another rate hike this cycle

US Treasury yields and the USD rose after a series of US data releases that were broadly in line with consensus but kept pressure on the Fed to raise rates later in the year. The NZD has sustained the weakness that followed yesterday’s stronger-than-expected Australian CPI data, which encouraged selling on the crosses.

In the US, the core PCE deflator was in line with consensus for July, at 0.2% m/m and 3.3% y/y, leaving the annual increase well above the 2% target. The second estimate of Q2 GDP was unrevised at 1.5%, but “core” growth, as measured by final sales to private domestic purchasers, was revised up from 3.9% to 4.2%, the strongest pace in more than three years. The third quarter has begun on a softer note, with real personal spending flat in July, as foreshadowed by the recent weak retail sales report. Durable goods orders rose a strong 1.1% m/m in July, though this was driven by higher aircraft orders. Excluding transportation, the 0.4% m/m rise was more tepid, particularly once higher inflation is accounted for.

US rates and the USD strengthened after the data releases, with the market viewing the lack of disinflationary pressure and ongoing economic resilience as reasons for the Fed to raise rates later this year. Rates nudged higher, with 9bps of hikes priced for the next meeting in mid-September and a cumulative 27bps priced by the December meeting. The 2-year Treasury yield is up 5bps on the day to 4.22%, while the 10-year rate is up 3bps to 4.66%.

An IRGC spokesman announced that a revenue-sharing agreement between Iran and Oman had been reached regarding the Strait of Hormuz, adding that “the US is obstructing this process, causing progress to be delayed”. With the US navy blockade still in force and the US not a party to the agreement, it remains a theoretical concept only and will also require mines to be removed. Maritime experts estimate that 80–150 mines remain in the strait, challenging President Trump’s claim that no mines remain. Brent crude is currently near USD88 per barrel, up from around USD86 yesterday afternoon, not helped by reports that Russia is preparing to escalate attacks on Ukraine after concluding that negotiations for a peace deal have reached a dead end.

US equity markets are relatively flat ahead of Nvidia’s earnings release after the close this morning.

Currency market movements have been modest, although the USD has made a small, broadly based gain overnight, aligned with the lift in rates that followed the US data releases.

The NZD came under selling pressure yesterday following the stronger-than-expected Australian CPI release. The monthly CPI data for July showed the headline rate falling only to 3.5% y/y, with the trimmed mean steady at 3.6%. This led the market to price in an increased chance of another rate hike this cycle — now fully priced — with the next meeting in late September seen as live. Recent RBA commentary has noted the risk of further tightening if upside risks to the inflation forecasts materialise.

Australian rates and the AUD rose after the release, and it is clear that some lazy long NZD/AUD positions were liquidated. Given the still-large negative carry from holding this position, there is low tolerance for anything that questions the merit of the trade. The market reaction was contained to the extent that the RBA is seen as delivering perhaps only one more hike, following three hikes earlier this year, rather than a further series of hikes. The AUD rose to a near two-month high just under 0.7190 before meeting some resistance. This morning, it sits at 0.7170. The NZD has weakened to 0.5940, while NZD/AUD has sustained a fall of more than ½ cent since the CPI release, trading below 0.8290.

There has been little movement in NZD crosses overnight, but the key crosses are all weaker than this time yesterday. NZD/EUR has dipped below 0.51. The ECB’s Schnabel warned in a Bloomberg interview that interest rates must rise, saying, “at the current policy rate, inflation is unlikely to return to target over the medium term, and therefore further tightening will be necessary”. The market already almost fully prices a September rate hike, so the real question is whether more hikes will follow.

With the chance of Fed and RBA hikes, and the ECB in the mood to tighten further, it is imperative that the RBNZ gets a move on, particularly as NZ’s policy rate remains well below those of the US and Australia. Higher NZ inflation through the currency channel has been a recent feature and will persist unless the rates gap is closed significantly.

Domestic rates were lower yesterday, dragged down by the decline in global rates during the prior overnight session. NZGB rates fell 3–5bps across the curve, while swap rates fell 3–4bps. An RBNZ rate hike next week is still seen as near-certain, but only one further hike is priced over the following two meetings before year-end, which seems light.

On the economic calendar, Australian household spending data for July are released today. In the US tonight, only second-tier releases are scheduled, including advanced trade data for July and weekly jobless claims.

Jason Wong is the senior Markets Strategist at BNZ Markets.