Market movements were moderate overnight, with limited movement in the equity, bond and currency markets. The US 10-year rate continues to hover just below the 1.50% mark. Commodity currencies outperformed as the NZD continued to recover from its sell-off last week.
Economic data remains strong and consistent with a rapid global recovery. The European composite PMI, a timely indicator of economic activity, has reached its highest level in 15 years, with the services sector increasingly catching up to the strength of the manufacturing sector as countries take action to remove related restrictions at Covid. IHS Market observed that manufacturers saw “rapid increases in raw material and fuel costs ” while companies in the service sector had to pay higher wages to recruit staff. In the UK, the composite PMI has remained close to all-time highs while in the US, the manufacturing PMI has hit a new record and while services activity has declined, it has remained at a historically high level. On a less positive note, new home sales in the United States continue to decline, as suggested by lower mortgage applications.
Atlanta Fed Chairman Bostic was the last Fed official to comment on the 2022 rate hike. Bostic added that the economy was “close to the meeting “ the criterion of “substantial further progress” was necessary in order to start declining. So far, most of the hawkish noise has come from regional Fed chairmen, rather than the board of governors and the president. On that note, Fed Governor Bowman pointed out that more than 10 million people were still unemployed and, in his opinion, inflationary pressures should ease over time.
The market has not reacted much to the economic data, with investors already bracing for a very strong recovery this year. The US 10-year rate climbed to 1.49%, 2bp more than the close of the previous session. The S & P500 and NASDAQ both made small gains (+ 0.1% and + 0.3% respectively), with both indices continuing to hover around their all-time highs.
Commodities are also generally firmer, with copper prices rebounding 2.3% after China’s first sale of copper from its strategic reserves was weaker than expected. Crude oil prices edged up, with Brent trading around $ 75 a barrel, after the DOE’s weekly report showed a substantial 7.6 million barrels drop in crude oil inventories in the United States. United. The start of the summer driving season in the United States is expected to increase demand pressures. Oil prices retreated from today’s highs after Saudi Arabia’s Energy Minister said the OPEC + cartel had a role to play in “tame and contain inflation», Potentially foreshadowing future increases in supply.
Commodity-linked currencies continued to recover from their massive sell-offs after the FOMC, supported by the largely positive commodity and risk backdrop. The NZD and AUD lead the currency rankings, with both currencies rising by around 0.25% in the past 24 hours. The NZD is now more than a cent above its post-FOMC lows and is trading around 0.7040 this morning. The NZD and AUD have reacted little to developments in Covid-19. In Sydney, additional restrictions were put in place after more community cases were recorded while the revelation that an infected Australian traveler visited a number of tourist hot spots in Wellington over the weekend led the government to move Wellington to Covid alert level 2 until Sunday.
The other notable driver in the forex markets was the JPY, which fell 0.3% to its lowest level since the March convulsions of last year. The USD / JPY is just below 111 this morning. The USD indices are barely changed, as is the EUR.
There was a slight pullback in New Zealand swap and bond rates yesterday, amid downward pressure on global rates and perhaps some nerves around changing Covid alert levels -19 for Wellington. As the market has grown increasingly confident that the RBNZ will start raising rates in the first half of next year, the ever-present risk of another foreclosure continues to persist. 2- and 5-year swap rates fell 3 basis points to 0.72% and 1.36% respectively, while the 10-year swap rate fell 2 basis points to 1.90 %.
New Zealand debt management yesterday announced the government bond bidding schedule for July, revealing an increase in nominal bond bids from $ 300m / week currently to $ 500m dollars / week. The increase in the bond supply was in line with our expectations and did not prompt an immediate reaction from the market. Over time, we would expect supply and demand forces to put some upward pressure on government bond yields (mostly longer term) as supply increases over the month. next and the RBNZ is expected to stop its bond purchases before starting to increase OCR. More immediately, attention will turn to the RBNZ bond purchase announcement for the week ahead tomorrow for its response.
It’s a busy session ahead, with five Fed officials on the speaker circuit and US durable goods orders and the first jobless claims among the data released. The Bank of England meeting will not see any policy change, although the market will listen to any hawkish nuance around the outlook.