NZD outperforms, up to two-month high

The most notable feature of the overnight market moves was a sharp rise in long-term rates and an aggressive steepening of the US curve. The US 10-year yield is 10bps higher overnight, at 2.88%, with similar sized moves seen in other markets. In contrast, US equities and the dollar largely consolidated overnight after their big post-CPI moves. The NZD has outperformed, now trading at a two-month high around 0.6430. New Zealand yields were higher yesterday, especially on the long end of the curve, and those moves are likely to continue today.

There hasn’t been much news to boost markets in the past 24 hours, with investors instead continuing to digest the downside surprise in the US CPI on Wednesday night and its implications for Fed policy and asset classes.

The initial take, at least from the Fed, is that the work on inflation is not done yet. San Francisco Fed President Daly told the FT that inflation was still “much too high” and “we haven’t finished [with tightening] Again ”, messages similar to those of Evans and Kashkari immediately after the publication of CPI. However, without ruling out another 75 basis point hike, Daly said his baseline was for a slower pace of tightening in September, to a 50 basis point move. The market cut prices for a Fed rate hike of 75 basis points in September to around 40% (from around 80% before the CPI release) while lowering its expectations for a rate cut this year. next. The net result is that there hasn’t been much change from the expected peak in the cash rate this cycle, which should still be around 3.65%. The US 2-year rate is little changed from yesterday’s close.

While US short-term rates were little changed in the past 24 hours, there was a sharp rise in long-term rates and a sharp steepening of the curve. The US 10-year rate is up 10 basis points overnight to 2.88%, now significantly higher than it was before the CPI was released. The US 2y10y curve, which hit an over-20-year low of -50bps ahead of the CPI release, is back at -35bps, still deeply inverted and a harbinger of a recession l next year, but now at less extreme levels. The rise in long-term rates was felt globally, with the UK 10-year rate up 11 basis points, the German 10-year rate up 8 basis points and the contract’s implied yield Australian 10-year bond futures are about 12 basis points higher than when the New Zealand market closed.

US equities largely consolidated overnight after their big post-CPI rallies. The S&P500 is up about 0.1% and has now recovered about half of its ‘bear market’ selloff. The NASDAQ is down slightly, but only 0.4%, after the 2.9% rally the previous day. At first glance, the stock market appears to be pricing that the Fed won’t necessarily need to tighten as aggressively as previously thought, which could prolong the economic cycle and support corporate earnings. Disney reported better-than-expected earnings after yesterday’s bell, including higher-than-expected subscriber numbers to its Disney+ service, seeing its share price rise 6%.

Like stocks, the USD was in consolidation mode overnight. The BBDXY index is down 0.1% on the session, after its 1% selloff after the CPI, with most overnight currency movements limited to +/-0.2%. The NZD was the exception, rising 0.4% to 0.6430, its highest level in more than two months. NZD’s rally from its July lows was accompanied by a broad-based improvement in risk appetite, including a more than 10% rise in the S&P500.

Economic data overnight was second level and flat in the market. Initial jobless claims continue to rise gradually, suggesting some easing in the labor market, although analysts warn that seasonal adjustment issues at this time of year make interpreting the data a bit tricky. more difficult. US PPI inflation was weaker than expected although market interest was minimal given yesterday’s CPI release.

Oil prices are higher overnight, with Brent crude oil futures hitting the $100 mark, up 2.5% on the day. The IEA has raised its estimate of global oil consumption by 380,000 barrels per day, in part due to a greater gas-to-oil transition, particularly in Europe which is facing gas shortages. Base metals were also higher overnight, with copper rising 1.1% to a six-week high.

The New Zealand curve also experienced a strong steepening yesterday. The 10-year swap rate was 8 basis points higher, at 3.61%, while the 2-year rate was only 3 basis points higher. The underperformance of New Zealand rates during the session (the NZ-US 10-year spread increased by almost 10 basis points) likely reflects investors’ nervousness around the possibility of a hawkish MPS from the RBNZ next week. We can expect higher domestic rates and a steeper curve again today after the overnight moves in US Treasuries.

There was more negative housing data yesterday, with REINZ reporting a further 1.4% drop in property prices, bringing the cumulative decline since November’s peak to around 8% (adjusted seasonal). Further declines in house prices are on the horizon, with the number of days to sell dropping to 47 (from 31 a year ago) and REINZ reporting rising inventory levels while decreasing new listings. We still have a peak-to-trough drop of 15-20% projected for house prices, similar to a bit larger than the drop predicted by the RBNZ in its May MPS.

This morning sees the release of the New Zealand manufacturing PMI, which was just below the 50 threshold in June, and food prices. The University of Michigan Consumer Sentiment Survey is out tonight with confidence expected to remain at rock bottom.

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