Dollar strength across the board and notable weakness in the Euro and British Pound

The key market move overnight was USD strength for no apparent reason, with EUR and GBP noticeable weakness despite a backdrop of slightly higher European yields and slightly lower US yields. US data was mixed, as a number of Fed speakers came out in force to reiterate the view that rates need to rise to fight inflation. The NZD took a brief peek above 0.63, but USD strength is pushing it back down towards 0.6250.

US stocks have been in and out of positive territory all day and the S&P500 is currently flat for the session. There was mixed economic news in the US and lots of Fed talk, creating choppy price action in US Treasuries, but the net movement was modest, with the 2-year rate down by less than 5 basis points and the 10-year rate down 2 basis points. at 2.87% for the day, little change from the New Zealand market close. European yields pushed higher, rising 1-2 basis points for 10-year policy rates, after the sharp rise in rates in the previous session.

Existing home sales in the United States fell 5.9% m/m in July, the sixth consecutive monthly decline, compounding a 26% decline since January. The data extends the poor streak of housing market data showing a deep downturn underway in the sector, with activity falling at a much faster pace than expected, driven by higher mortgage rates and high prices. On a more positive note, jobless claims were 14,000 below expectations at 250,000, helped by a downward revision of 10,000 for the previous week. And the Philadelphia Fed’s manufacturing indicator showed a surprising rebound in August, bucking the recent plunge in the equivalent New York index.

The Conference Board’s leading index is not widely reported as it compiles 10 indicators that have already been released, but for the record it fell for the fifth month in a row, putting it on track to signal an economic recession. imminent, consistent with the message of the inverted 2s10 yield curve.

FOMC members were out in force to give interviews. Bullard said he was leaning towards another 75 basis point hike next month, moving quickly to a key rate that will put downward pressure on inflation. He is still in favor of the Fed Funds rate reaching 3.75-4% by the end of the year, saying, “I don’t really see why you want to extend interest rate hikes this year. next year “. He is optimistic about the economic outlook and said market speculation about rate cuts next year is “definitely premature”.

George said the case for continuing the rate hike remained strong, but acknowledged that the pace of rate hikes was still up for debate. Daly said it was too early to declare victory on inflation and favored the Fed Funds rate reaching just over 3% by the end of the year and a little higher l ‘next year. Kashkari noted that the Fed still had work to do to reduce inflation “urgently” and doubted the Fed could reduce inflation without a recession.

None of these Fed talks had much impact on the market with their views already known. While stocks and US Treasuries haven’t moved much, the USD is showing notable strength, with dollar indices up in the range of 0.6-0.7% on the day. The Euro and British Pound are down almost 1% for no apparent reason other than the Eurozone and UK economies are basket case cases, which is already widely acknowledged given the great energy crisis across the Europe. On that note, European gas futures rose just under 7% to a new record high of 241 EUR/Mwh. Germany has reduced the VAT rate on gas sales to households, but that looks more like a sign of desperation than anything and will do nothing to reduce the gas demand that is urgently needed.

The EUR is trading at 1.0090 and it looks like it could easily retest below parity in the not too distant future. The GBP fell to 1.1935. Commodity currencies did better than the others overnight, with only modest declines against the USD. Oil prices are up almost 3%, with Brent crude back to above $96 a barrel, following surprisingly strong data from the EIA. U.S. crude inventories fell 7.06 million barrels last week, U.S. exports hit a record high of 5 million barrels a day and there were signs of increased demand for gasoline after the recent sharp drop in prices.

The NZD briefly peeked above 0.63 but fell back towards 0.6250. The AUD rallied to 0.6970 after weakening on the jobs report, but fell back around 0.6920. Employment fell by more than 40,000 in July, but weaker turnout pushed the unemployment rate down to a new multi-decade low of 3.4%. Under the hood, the data still seemed consistent with the fact that the RBA needed to do a lot more work on rates to help ease the pressure on wage inflation.

The NZD crosses are fairly flat for the day, apart from gains of around 0.5% against the EUR and GBP at 0.62 and 0.5240 respectively.

In other news, yesterday the United States announced that it and Taiwan will begin negotiations for a bilateral trade and investment initiative in the coming months to deepen ties on a range of issues. , including technology and agriculture. China’s foreign ministry condemned the talks and a spokesperson urged the “US not to miscalculate on this,” seeing it as a threat to China’s sovereignty.

New Zealand long rates were pushed much higher yesterday by global forces, while the short end of the curve was a little stiffer, creating a curve steepening bias. NZGB and 10-year swap rates rose in the range of 11-12 basis points, while the 2-year swap rate rose only 3 basis points.

In the day ahead, we expect to see another large monthly trade deficit for New Zealand which will take the annual deficit to a new record nearing $11 billion. On the global calendar, pay attention to CPI data for Japan and retail sales data for the UK and Canada.

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