Todays podcast

• US equities trade in and out of positive territory
• UST yields lead decline in core yields, imminent Debt Ceiling one driver
• But softer US consumer confidence and labour market data a factor too
• Weaker EZ Economic confidence and lower inflation data played their part too
• Oil prices fall over 4%. OPEC + meeting looms large
• USD little changed. JPY outperforms post BoJ/MOF warning
• AUD and NZD struggle, not helped by Yuan weakness
• Coming up: RBA Lowe, CH PMIs, German/France CPI, JOLTS, Fed Beige Book

Events Round-Up

NZ: Dwelling consents (m/m%), Apr: -2.6 vs. 6.6 prev.
AU: Dwelling consents (m/m%), Apr: -8.1 vs. 2.0 exp.
EA: Economic confidence, May: 96.5 vs. 98.8 exp.
US: Conf. Board consumer confid., May: 102.3 vs. 98.8 exp.

Thought you wanted to make this work,
But you’re sending me mixed signals –  Robbie Williams

After enjoying a long weekend, the US is back in business with mixed signals coming from equities and bond markets. US Treasuries have led a move lower in core global bond yields with the market seemingly trying to assess the economic implications from a debt ceiling deal (bigger fiscal drag hampering an already challenged growth outlook?) with softer US and EU data also fuelling the move. Meanwhile US equities seem less concern, the S&P 500 is unchanged while the NASDAQ is a tad higher. Oil prices fall over 4% with OPEC + meeting looming large, the USD is little changed, JPY outperforms post BoJ/MOF warning while AUD and NZD struggle, not helped by Yuan weakness.

US Treasuries have started the new holiday reduced working week very well supported with yields down between 10 and 11bps up to the ten-year part of the curve. The 2y rate is down 10bps to 4.46%, the 10y Notes is 11bps lower to 3.69% while the 30y part of the curve has lagged the move down just 6bps to 3.89%. The in-principle agreement over the weekend on the US debt ceiling has been a major factor at play with the market pricing out the risk of a US Government default, indeed there has been big moves in T Bills maturing in the first half of June (Bills close to the X date), for instance bills due June 6 yielded 5.2%, down from about 7% at one point last week.

Looking at Fed pricing expectations, the market has retained a bias for a potential Fed hike in June ( 64% vs 69% on Friday) but there has been a more notable move on rate cut expectations around the turn of the year and onwards with the Fed funds priced at 4.77% by the end of January next year, down from 4.86% on Friday. So compared to last week, the market is thinking the economic outlook will allow the Fed to be more aggressive in its rate cuts late this year and thereafter.

Overnight US data releases also played a contributing role for the move lower in UST yields. US consumer confidence fell to a six-month low with details in the report also revealing a bearish picture, the Conference Board business expectations index fell to its lowest reading since 2011 while the share of consumers who said jobs were “plentiful” fell to the lowest level in more than two years. Adding to the gloom, the share of respondents expecting more employment opportunities in the coming six months fell to the lowest since 2016. The Conference Board survey follows the University of Michigan consumer sentiment reading which also fell last week.

European core yields also fell last night with 10y Bunds down -9.2bps to 2.34% with Italian BTPS down 14bps to 4.14%.     Economic confidence – a composite of consumer and business confidence – fell to 96.5 while other credit readings also revealed a softening in demand. Importantly too for the ECB policy outlook EU country inflation readings surprised to the downside, Belgium’s national CPI moderated from 5.6% yoy in April to 5.2% in May. Spanish (national basis) May CPI inflation moderated to 3.2%yoy (4.1% in April). This was 4-ticks below consensus (HICP inflation moderated from 3.9%oya, to 2.9%oya). Tonight we get France, Germany, and Italy CPI reports, all ahead of the Euro zone aggregate due for release on Thursday. The recent data flow suggests the EZ economy is slowing more rapidly with inflation also potentially declining more quickly.

Moving onto equities, the S&P 500 traded in and out of positive territory ending the day little changed and just above the 4200 mark. Consumer discretionary and IT gained ~ just under 1% while Consumer staples and Energy underperformed, down around 1%. The Energy sector was not helped by a steep decline in oil prices (down ~4%) as the market continues to asses the demand outlook vs a challenging economic backdrop alongside the uncertainty from OPEC +, the market is becoming increasingly worried that OPEC+ will not provide additional price support to oil at the upcoming meeting on June 4. Meanwhile the NASDAQ managed to edge higher again, up 0.32% overnight with Nvidia still enjoying its moment in the sun, up just under 3% overnight.

The USD is little changed in index terms, weaker vs JPY and GBP, but stronger vs commodity FX. The yen is at the top of the leader board, up 0.5% (USD/JPY at ¥139.79) following comments/warnings from Japan’s top currency official Masato Kanda that “It’s important that currency markets reflect fundamentals and move in a stable manner. Excessive moves aren’t desirable,”. Kanda’s comment came after the first meeting of Japan’s Ministry of Finance, the Bank of Japan and Financial Services Agency since March. As my BNZ colleague, Jason Wong noted, the irony of course is that the BoJ’s monetary policy doesn’t reflect fundamentals, with inflation exploding well above target but the central bank insisting the move is temporary and continues to artificially suppress rates.

AUD and NZD are amongst the underperformers over the past 24 hours with most of their decline coming during our APAC trading time yesterday . The AUD starts the new day at 0.6517 ( -0.37% over the past 24 hours) while NZD is 0.642 (-0.2%). We see the antipodean’s under performance linked to Yuan weakness, yesterday USD/CNH scooted up to/through 7.10 ( and USD/CNY from ~7.07 to above 7.09). Both CNH and CNY made new YTD highs, with as yet no sign of displeasure from PBOC (this after an unremarkable pre-open fixing vs expectations but which is the highest since 1 Dec 2022). The market is becoming increasingly concern over the strength, durability and nature of China’s economic recovery with expectations of further fiscal and monetary support not yet met by officials.

Finally, worth pointing out that sometime this morning the House Rules Committee should vote on the US debt-ceiling bill. Expectations are for the bill to pass which would set the stage for a floor vote Wednesday evening.

Coming Up

• We have a full calendar today, starting with RBA Governor Lowe testimony before the Senate Economics Committee followed by AU Q1 Construction Work Done (NAB 2%, Mkt 0.5% vs -0.4% prev.) and AU April Monthly CPI reading. Also this morning, Japan gets Industrial Production Data for April (Final reading 1.4% vs 1.1% prev.) and China releases its official PMIs for May where the market is looking for the manufacturing sector to extend its contraction into a second consecutive month (49.5 exp vs 49.2 prev.) while the non-manufacturing sector is seen retaining a healthy expansionary rate at 55.2 from 56.4 previously.
• Our economists note that Australia’s Monthly CPI Indicator is not the full CPI and has inadequate coverage of services inflation to be conclusive on broader inflation dynamics, thus it should be interpreted with caution. For April the indicator is seen lifting to 6.6% y/y from 6.3% previously and bit above the consensus for 6.4% (before falling back in May). Large base effects from fuel are the key driver, with travel and accommodation prices around Easter volatility adding uncertainty.
• As for RBA Governor Lowe’s appearance before the Senate Economic Committee, late last week media outlets reported that the Governor gave a ‘pessimistic’ briefing to parliament’s economics committee behind closed doors. Sources described the tone as “notably more downbeat because of an emphasis on the risks to achieving the bank’s forecast inflation and unemployment targets.” We can’t help but wonder if that pessimism will come through in his appearance today.
• Later today and ahead of the EZ CPI reading on Thursday, Germany releases CPI figures for May (Provisional) with the market looking for a 0.3%mom (0.4% prev.) print, taking the yoy reading to 6.5% from 7.2% prev. France also releases CPI figures (5.5%yoy vs 5.9%prev.) and Germany publishes May unemployment change. The ECB also releases its s financial stability review.
• US data highlights include May MNI Chicago PMI, Dallas Fed services activity and April JOLTS report (9439k exp vs 9590k prev.) as well as the Fed Beige book.
• ECB Visco, Villeroy and Fed Collins, Harker and Jefferson speak.

Market Prices

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