By Jason Wong*
US Treasury yields are slightly higher after an upward revision to US GDP, driven by consumer spending, and this has helped support the US dollar, with added support as the euro weakened following weaker German CPI inflation. Most US equities are higher, with a fall of 6% for Nvidia a drag on the S&P500. A stronger ANZ business outlook survey supported the NZ dollar on Thursday, although it has slipped modestly overnight to US62.60c.
After all the hype Nvidia’s earnings report, released after yesterday’s market close, beat analyst estimates across key metrics but didn’t meet the lofty expectations built into the share price and it is currently down about 6%. There has been no spillover into the wider market with the rest of the “magnificent seven” stocks all higher and the S&P500 is currently flat, weighed down by Nvidia.
While investors seem to be embracing the soft-landing economic narrative, discount store Dollar General sent a warning sign about the state of play for lower-income households, with management noting their deteriorating finances as a factor in its earnings results, which sent its share price down 30%. In Europe, the Euro Stoxx 600 index closed up 0.8%, to within a whisker of a record high.
Economic data releases have had some impact on bond and currency markets. German CPI inflation was two-tenths weaker than expected, falling from 2.6% year-on-year to 2.0% year-on-year in August, the weakest annual reading in over three years. Spain’s CPI fell from 2.9% to 2.4%, slightly weaker than expected at the headline level although the core CPI fell slightly less than expected to 2.7%. Slower inflation and recent data showing reduced wage inflation have paved the way for a second European Central Bank rate cut in September, which is fully priced. Euro area CPI data due tonight is expected to show a fall to 2.2%, with the core rate slipping to 2.8%.
Germany’s 10-year rate fell 6 basis points after the release before higher US rates dragged it higher and it closed up 1 basis point at 2.27%. The euro sustained a fall after the release and is down 0.4% on the day to 1.1080. There was some negative spillover effect on the British pound, which erased earlier gains to trade lower at 1.3170.
US Q2 (second quarter) GDP was revised up two-tenths to an annualised 3.0%, driven by an upward revision to consumer spending from 2.3% to 2.9% more than offsetting downward revisions to investment. The first release of the real GDI measure showed a 1.3% annualised gain, unchanged from Q1, highlighting that the income-based measure of GDP conveys a relatively softer economy. The core PCE (Personal consumption expenditures) deflator was revised down one-tenth, running at an annual pace of 2.8%. Timelier data for July are released tonight.
In other US economic releases, initial jobless claims were close to expectations slipping a touch to 231k and consistent with a flat trend recently; pending home sales plunged 5.5%; and the trade deficit widened to -$102.7b in July, driven by imports, supporting the case that net exports will make a negative contribution to Q3 GDP.
US Treasury yields jumped modestly higher after the GDP release and the move has been sustained, with 2 and 10 year rates up in the order of 3 basis points. Signs of solid consumer spending saw a slight paring of rate cut expectations but 100 basis points is still priced over the three meetings for the rest of the year.
While the US dollar is broadly stronger overnight, over a 24-hour period the NZ dollar and Australian dollar have outperformed. The stronger NZ dollar was supported by higher rates following the release of the ANZ business outlook survey, some rare positive news after the recent barrage of woeful data. The survey showed a further broadly based lift in confidence and activity indicators, supported by the Reserve Bank’s dovish pivot in July. Headline business confidence was the highest in a decade, with businesses likely embracing the direction of government policy in addition to the lower interest rate backdrop. “Reported” activity remained very weak, but the survey gave some hope that NZ will be out of recession later in the year.
The NZ dollar met some resistance just under US63c – a level not seen since the first trading day of the year – and has slipped overnight to US62.60c. NZD/AUD jumped to as high as AU92.60c but the gain has been fully eroded. The AUD also reached its highest level since the first trading day of the year, above US68c, and NZD/AUD has slipped back down to just over AU92c. Other NZD crosses are all higher.
Domestic rates were higher across the curve in the lead up to, and following, the ANZ survey. Although there was little paring of near-term rate cut expectations – the market still pricing in 75 basis points of cuts over the next two meetings – the 2-year swap rate rose 5 basis points to 3.93%, while the 10-year rate rose 4 basis points to 4.0%. NZ Government Bond yields were up 2-4 basis points across the curve. The bond tender showed only modest demand, particularly for the longer dated bonds.
The economic calendar is heavy as the week draws to a close. During local trading hours we’ll see NZ consumer confidence, building consents, Tokyo CPI and Australian retail sales. Tonight sees euro area CPI, Canadian GDP and the US PCE deflators for July. For the latter, the consensus is for a 0.2% rise in the core PCE deflator, with a clear risk of it being only 0.1%. China PMI data are released over the weekend.
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*Jason Wong is BNZ's Senior Markets Strategist. David Chaston will return on Monday.
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