Today’s podcast

• Equities extend recent gains ahead of policy meetings later in the week and US CPI tonight
• UK Gilts lead move up in 10y Core yields. Hawkish BoE speakers the driver
• UST curve steepens modestly. Front end yields lower, 10y unchanged at 3.735%
• USD edges slightly higher. GBP the notable underperformer. AUD a tad higher
• Oil prices tumble, down ~4% Russia vs Saudi supply strategy a concern
• Coming up: NAB Business Survey, AU Consumer sentiment, UK Labour Mkt, German ZEW survey, US CPI

Events Round-Up

NZ: Card spending total (m/m%), May: -1.9 vs. 0.5 prev.

Must I always be waiting, waiting on you? – Jack Johnson

After closing modestly higher on Friday, US equities have started the new week with modest gains, led by big tech. 10y UK Gilts, up 10bps to 4.33%, are the notable movers within core global bond yields on the back of hawkish BoE talk. The USD is a tad higher with AUD retaining its upward trend that has been in place since the start of the month, GBP underperforms, getting no help from the move up in Gilts. Oil prices tumble on supply-demand dynamics and another downgrade by GS.

Ahead of a busy week packed with policy meetings (Fed,ECB, PBoC and BoJ), equities have edged higher against a backdrop of quiet market conditions, waiting, wishing for market friendly outcomes. After clearing the 20% gain threshold last week (technically marking the end of a bear market), the S&P 500 has retained its bullish momentum, climbing 0.93% on Monday and closing the day at 4390 . The IT sector led the gains on the day, up close to 2% while energy underperformed, down 1% not helped by a decline in oil prices (more on that below). The NASDAQ gained 1.53% with Tesla extending its gains for a 12^th straight session while Oracle jumped 6% ahead of its results. Earlier in the session, European Equities also closed in the green with the EuroStoxx 600 +0.16%.

10y UK gilts were the notable movers within core global bond yields overnight, up 10bps to 4.33%. Hawkish BoE rhetoric was a factor at play with BoE Haskel supporting further rate hikes to guard against persistent inflation risks. Writing in the Scotsman newspaper, Haskel said “My own view is that it’s important we continue to lean against the risks of inflation momentum, and therefore that further increases in interest rates cannot be ruled out.”. In a similar vein, BoE Mann (the most hawkish committee member) said she’s still “very concerned” about persistent pressures pushing up UK inflation.   The remarks lifted UK Gilts across the curve and helped firm up expectations of further BoE hikes ahead. The OIS market now sees the BoE Terminal rate at 5.50% by the end of the year, a week ago pricing was at 5.39%.

10y UST yields are little changed at 3.735%, but a look at the intraday chart reveals a 9bps range during the overnight price actions (3.70% to 3.79%) . UST yields were dragged lower earlier in the session following the release of the NY Fed Consumer survey which showed year-ahead median inflation expectations fell three-tenths to 4.1%, its lowest reading since May 2021, although both 3-year and 5-year ahead figures ticked higher to 3.0% and 2.7% respectively. Shortly after, 10y UST yields traded to their intraday highs following a softer outcome to the 10y Note auction, the Treasury’s $32bn auction was awarded at 3.791%, the highest since March, vs 3.776% WI yield. The UST curve ended the day with a mild steepening bias, 2y rates down 2bps to 4.579%.

The USD is up slightly (up ~ + 0.05% on both DXY and BBDXY) with the AUD (+0.2% to 0.6752) and European currencies managing a modest outperformance (euro +0.12% to 1.076, SEK and DKK +0.22). Of note the AUD/USD has retained its upward trend established at the start of the month, a repricing of RBA rate hike expectations after the Bank surprised the market (by hiking to 4.10%) earlier in the month has been a significant driver for the recent move up in the AUD. Growing expectations of a Fed pause this week has also been helpful while a risk positive backdrop evident by the comfortable move up in the S&P 500 above the 4300 mark has been supportive too. The AUD/USD traded to an overnight high of 0.6773 and now starts the new day at 0.6752.

The NZD began the week on a soft note. An overnight move above 0.6150 proved temporary and the currency is back to trading around 0.6120, so no net progress overnight. That said, GBP is the notable underperformer within the majors (USD/JPY little changed at ¥139.53), the pound was unable to get a any love from the move up in UK Gilts with the market showing more concerns over the gloomier UK economic outlook likely to be exacerbated by a BoE determined to bring inflation to heel, sterling ended the day down 0.5% to 1.2512.

Oil prices tumbled around 4% overnight (WT -4.43% to $67.24 and Brent -3.98% to $71.97) amid growing concerns over a supply glut vs anaemic demand .  The market is becoming increasingly concern over the potential of a supply war between Saudi Arabia and Russia, Saudi Arabia is trying to reduce supply and last week the largest global oil exporter, announced a plan to decrease output by 1m/b per day (bpd) in July, bringing it down to 9 m bpd. But with Russia in need of money to fund it Ukraine invasion, we now know that Russian oil exports to China and India surged to record high levels in May. The contrasting Saudi vs Russia supply strategies are now causing tensions in the market, further exacerbated by a sluggish recovery of Chinese demand. Not helping sentiment, overnight, Goldman Sachs revised down its oil price forecasts for the third time in six months.

Coming Up

• We have a busy calendar today, starting with New Zealand’s net migration data, followed by the May NAB Business Survey and Australia’s monthly consumer sentiment reading.
• In terms of the NAB Business Survey, no hints here, but worth noting that in April the Survey revealed a small improvement in Confidence to a still subdued reading of 0, from -3.84 while Conditions eased two points to 14 (still above the long-term average of 6.4). Consumer Confidence is worth a look too, given it will be a purer read of how consumers are reacting to the RBA, with the prior survey spanning the May Budget rather than the RBA’s decision to hike.
• Looking at offshore markets the UK releases it labour force update for April and Germany gets the ZEW Survey for June (Expectations down to -13.1 from -10.7, Current Situation -40.2 from -34.8). UK Weekly earnings are expected to show a 3M y/y rise of just under 6% at the headline (after 5.8% in March) with ex-bonus earnings higher at 6.9% from 6.7%. The ILO unemployment rate is seen climbing one tenth to 4%.
• Ahead of the two-day FOMC meeting which starts early tomorrow our morning, later today the US gets CPI figures for May. Core CPI inflation is expected at 0.4% m/m, a similar pace to last month. Any upside surprise would increase the probability the Fed moves early our Thursday morning.
• BoE Governor Bailey testifies to House of Lords, BoE’s Greene testifies to ParliamentMarket Prices.

Market Prices

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