Risk appetite weakened a bit at the end of last week, with equity markets posting declines and the US 10-year rate closing below 1.3%. Currency movements were modest, with the NZD noticeably outperforming following a much stronger than expected CPI impression which cemented expectations of a series of rate hikes starting next month.

Friday night’s trading session was rather gloomy following mixed US economic data. Retail sales in the United States were stronger than expected in June, with non-auto and gas sales up 1.1% m / m, although May sales were revised down. Consumers remain cashed in, with sales coming from government handouts earlier in the year.

The market seemed more attentive to the University of Michigan consumer confidence index, which unexpectedly fell to its lowest level in five months in July. The survey commentary noted that higher inflation had put additional pressure on living standards, with “consumer complaints about rising prices for homes, vehicles and durable household goods” reaching an all-time high. . Inflation expected for the coming year has reached a 13-year high of 4.8%. The longer-term 5-10 year measure, to which Fed policy is more sensitive, rose to 2.9%, at the high end of the 2.2-3.0% range of the last decade.

The low confidence survey saw US stocks and US Treasury yields fall. The S & P500 fell 0.75%, pushing down 1% for the week as a whole, after three consecutive weekly gains that took the index to an all-time high. The 10-year rate fell 3 basis points from the New Zealand close at 1.29%, its lowest close since February.

The spread of the delta variant of COVID19 across the world remains a key target for the market. The US CDC reported that the number of new cases has increased in 49 states. New cases have risen in the UK, with the daily rate exceeding 50,000 – the highest in six months – and before the final restrictions were lifted from today, so-called Freedom Day. The increase in the number of cases is also evident across Europe. The spread of the virus, even in well-vaccinated countries, is likely to see delayed recovery pathways as consumers behave more cautiously.

In currency markets, moves were modest, but the weaker risk environment on Friday night supported a stronger USD, although the EUR and JPY largely maintained their equilibrium. Commodity currencies and the GBP underperformed, the latter perhaps reflecting some concern about reinstating COVID19 restrictions in one form or another.

The AUD remained under pressure, dropping below 0.74 a new low for the year before closing the week around 0.74. The NZD escaped the same fate, supported earlier on Friday by a scathing CPI report (see below) that bolstered expectations that the official treasury rate is expected to rise from next month. On that day, the currency encountered resistance just below 0.7030 before closing the week around 0.70. For the week, the currency was little changed, a relatively good performance amid renewed dollar strength which saw the other commodity currencies, namely the AUD and CAD, down 1.2-1, 3%.

NZ’s Q2 CPI rose 1.3% q / q and 3.3% y / y, with an unusually large positive forecast error compared to market expectations of 2.7% y / y. Unlike recent US CPI figures, which have been exaggerated by the “reopening” of the economy, the rebound in inflation in New Zealand has been more general, indicating an overheated and overstimulated economy. Anecdotes and price indicators from business surveys have suggested this for some time, with the latter signaling that there are still plenty of benefits to be measured. Statistics NZ’s core CPI measures showed that annual inflation climbed to just over 3%, while the RBNZ’s sector factor model estimate – which has historically been smoother and higher. slow – posted 2.2% year-on-year, a 12-year high.

The OIS market has looked into a greater chance of a higher OCR in the remaining three meetings for the year, with a 25 basis point hike next month almost fully priced and just over two hikes. for the year. Now that higher rates seem unchallengeable, the debate is now likely to shift over how quickly the RBNZ might raise rates, and ultimately where the OCR ultimately needs to reach to bring headline inflation (and most core CPI measures) comfortably within the -3% target range, as required by law.

The NZGB and swap curves flattened after the announcement, with the 2-year swap rate closing up 5 basis points at 1.09% and the 10-year rate stable at 1.86%, with NZGB rates posting similar movements. For the week, the combination of the more hawkish RBNZ statement earlier in the week and stronger CPI data saw the 2-year swap rate rise 23 bps, while the 10-year rate was higher. high 10bp.

For households, the tightening cycle has already started, ahead of official spot rate hikes, with major commercial banks passing some of the higher wholesale risk rates seen last month onto mortgage rates. BNZ fixed mortgage rates rose 26 to 44 basis points on Friday.

Over the weekend, OPEC + regained control of the oil market by finally agreeing to a supply agreement that will see an increase in production of 400,000 barrels per day from next month and then gradually increase production. , committing to fully restore all cuts made at the start of the pandemic. By helping to reach a deal, some countries, including the United Arab Emirates, will be allowed higher production benchmarks. Monthly meetings will be organized to review market conditions. Brent crude was relatively flat on Friday near $ 73.50 and the supply deal should ensure the market remains tight in the near term.

The economic calendar for the coming week is quite sparse both domestically and globally, with the highlight being the ECB policy update and global PMIs towards the end of the week.

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