Today’s podcast

• String of positive US data surprises continues
• US Jobless claim record biggest fall since Oct-22, Q1 GDP revised up – 2% annualised
• German inflation accelerates again as expected. Underlying factors remain strong
• UST lead decent move up in core global bond yields. 10y UST +14bps to 3.8481%
• Fed terminal rate pricing edges higher. July hike now seen at 83% probability
• US equities unperturbed. S&P 500 and NASDAQ close with small gains
• Positive US data helps the USD reverse earlier losses. AUD outperforms
• Coming up: AU Credit, Tokyo CPI, CH PMIs, EZ CPI, US PCE

Events Round-Up

NZ: ANZ activity outlook (net%), Jun: 2.7 vs. -4.5 prev.
AU: Retail sales (m/m%), May: 0.7 vs. 0.1 exp.
EA: Economic confidence, Jun: 95.3 vs. 95.7 exp.
GE: CPI EU harmonised (y/y%), Jun: 6.8 vs. 6.8 exp.
US: GDP (ann’lsd q/q%, 3rd est.), Q1: 2.0 vs. 1.4 exp.
US: Initial jobless claims (k), 24-Jun: 239 vs. 265 exp.
US: Pending home sales (m/m%), May: -2.7 vs. -0.5 exp.
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Don’t Stop Me Now…
I feel alive
And the world, I’ll turn it inside out, yeah – Queen

The string of positive US data surprises continued overnight with a big drop in Jobless claims and a decent upward revision to Q1 GDP. US Treasuries led a jump in core global bond yields with the 10y Note climbing 14bps to 3.84%, underlying strength in German inflation supported the move up in core global bond yields too with the data flow vindicating the notion that both the Fed and ECB still have more work to do. US equities closed in the green, unperturbed by the move up in yields. Positive US data surprises help the USD reverse earlier losses, AUD outperforms and starts the new day at 0.6619.

US initial jobless claims fell by 26k to 239k in the week ended June 24, the decline was against expectations that the recent lift to around 265k would be sustained . The weekly fall was the biggest since October 2021 and the week included the Juneteenth holiday. The holiday may have distorted the underlying trend in the data with some US economists also noting that more distortions are likely over coming weeks given seasonal adjustment challenges associated with the timing and duration of the annual automakers’ shutdowns. The uplift in Challenger layoff announcements alongside WARN notices of plant closures and mass layoffs suggest we should see a rise in US jobless claims over coming months, but until the data plays ball, one cannot avoid the conclusion that for now the US labour market remains resilient.

The third estimate of US GDP growth in Q1 revealed a decent upward revision to 2% annualised growth from 1.2% previously.  The uptick in the number came from upgrades to exports and consumer spending. Household spending, rose at a 4.2% rate (3.8% seen prev.) the strongest in nearly two years with services outlays adjusted higher. So, the US consumer started the year in rude health powering the US economy with Fed policy tightening (until then) not quite managing a cool down in spending. The data also revealed core PCE deflator was revised down a tick to 4.9% annualised, while in a separate report pending home sales showed a larger than expected fall of 2.7% m/m in May.

Reaction to the better-than-expected US data releases triggered a jump in UST yields with the 2y to 10y part of the curve climbing between 14 to 17bps while the 30y Bond gained 10bps to 3.912%. As I type the 10y Note trades at 3.84%, 2bps below the overnight high ( +14bps up over the past 24 hours) while the 2y Note trades at 4.874%, +16bps. Fed rate hike expectations have also ticked higher with a 25bps hike in July now seen at 84% probability, up from 76% yesterday while a terminal Fed funds rate is now seen at 5.42% (effective) by November this year, up 5bps over since yesterday.

German inflation figures released overnight also fuelled the move up in core global bond yields, the headline reading for June rose to 6.8%yoy from 6.3% in May . This was in line with the consensus estimate, but details in the report revealed underling price pressures have remained strong, supporting the Bundesbank view (published on Monday) that “Underlying price pressures are likely to remain very high for the time being,”, harbouring “the risk that wage and price setters will increasingly orientate themselves to the higher inflation rates. The decline in inflation may therefore be more sluggish than previously expected.”.

Of some relief, Spain headline inflation fell below 2%yoy, while the core rate in June was 5.9%yoy, down from 6.1% in May. Yesterday Italy’s inflation revealed a decent decline, but at 6.7%yoy, it’s still well above the ECB target. France’s figures are due out tonight ahead of the EZ wide release (see more below). For now, Germany is driving price pressures higher in Europe while core readings else are still too high for the ECB’s comfort. 10y Bunds yields closed the day +10bps to 2.41% while 10y Italian BTPS gained 12bps to 4.094%.

The narrative of a stronger economy seemingly overwhelmed any equity concerns from the prosect of higher Fed funds rate. US equities shrugged off the move up in UST yields with the S&P 500 and NASDAQ posting modest gains on the day, up 0.45% and 0.01% respectively. Earlier in the session the EuroStoxx 600 index closed 0.13% higher.

The USD was drifting lower ahead of the US data releases, but the positive surprises and move up in UST yields helped the greenback regain lost ground . The DXY and BBDXY are up 0.42% and 0.24% over the past 24 hours with the USD stronger against all G10 excluding AUD. The euro has been a notable lagger, down 0.45% and now trades sub 1.09 (1.0865 as I type), JPY has extended its USD weakness with USD/JPY now trading at ¥¥144.77, a move up above 145 now seems only a matter of time, increasing the likelihood of MoF intervention.

CNY weakness has been another feature of the FX price action in the past 24 hours . After one of day of rest, yesterday the PBoC set the CNY fix at the highest premium so far this year relative to the Bloomberg consensus. The PBoC is signalling discomfort at the recent speed of CNY depreciation, but with fundamentals favouring a weaker CNY (China growth momentum slowing alongside PBoC easing bias vs US economy performing and Fed with a tightening bias), yesterday’s strong fix only provided a short reprieve, USD/CNH rose up through 7.27 overnight and notably this hasn’t been a particular drag on AUD performance overnight, or the NZD for that matter.

Indeed, the AUD has been the top G10 performer over the past 24 hours, up 0.2% to 0.6616 currently. Against a backdrop of a stronger USD, the AUD managed to hold its ground overnight aided by yesterday’s stronger than expected retails sales for May. Retail sales rose 0.7% m/m in the month, much stronger than the 0.1% consensus (NAB +0.3%). The strong result pushes back on fears that the economy was slowing more sharply than expected and highlights ongoing resilience among consumers, with resilience also seen in the labour market. We still expect the RBA to raise interest rates twice further in coming months and we see little real value from skipping July. That said June was a finely balanced decision so a delay until August would not surprise

Coming Up

• We have a busy calendar to finish off the week with New Zealand Consumer confidence the first cab off the rank. Australia gets private sector credit data and building approvals, both for May.
• Also this morning, Japan releases labour market data (jobless rate seen unchanged at 2.6%) and industrial production (May P -%mom, o.7% prev.), but more importantly, the June Tokyo CPI reports is also due for release with the core-core reading (CPI Ex-Fresh Food, Energy) seen rising yet again to 4.0%yoy vs 3.9% previously.
• China’s official PMIs for June are also out late this morning with the market looking for the Manufacturing PMI to print at 49 vs 48.8 prev. while the non-manufacturing PMI is seen at 53.5 vs 54.5 prev. So expectations are for an extension to the contraction in the manufacturing sector and further slowdown in the expansion of non-manufacturing activity.
• Eurozone inflation figures for June are out early this evening and the market is looking at a two tenth rise in the core reading to 5.5%yoy. If so, it would vindicate the ECB guidance for another rate hike in July and possibly September.
• US PCE Inflation figures are out tonight where consensus for the Core PCE Deflator is 0.3% m/m, one tenth below the previous month. The Chicago June PMI is also due for release (43.3 exp vs 40.4) followed by the final reading of the June U. of Mich. Consumer Sentiment survey.
• Canada publishes its April GDP report and the BoC releases its Q2 business outlook survey.

Market Prices

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