June 27, 2019

Markets Today: Bond yields bounce back

Will interest rates in the UK go up or down?

Today’s podcast


Overview: Unleash

  • NZD leads gains following  ‘a dovish, but not aggressively so’ RBNZ yesterday
  • Trump serves it up against: EU anti-trust regulations, Vietnam, and the Fed again
  • Conflicting tariff messages: Mnuchin states 90% there, Trump restates tariffs if no agreement
  • US yields climb led by the belly, a poor 5yr auction a factor, oil too, but no real decisive reason
  • Coming up, NZ ANZ Business Survey, CH Industrial Profits and German CPI

Mixed messages on trade overnight leave markets none the wiser ahead of the G20 meeting on the weekend. Risk sentiment initially picked after US Treasury Secretary Mnuchin stated “we were about 90% of the way there [with a deal with China] and I think there’s a path to complete this”, but then this quickly faded. President Trump again played down the prospects of a deal, stating “My Plan B is that if we don’t make a deal, I will tariff and maybe not at 25%, but maybe at 10%, but I will tariff the rest of the $600 billion that we’re talking about” “My attitude is I’m very happy either way”. With markets already sceptical of a deal (a BofAML survey found 2/3rds of investors expect no deal this weekend, but also no new tariffs either), the comments had little enduring impact on markets.

In terms of market moves, the NZD is the best FX performer +0.5% to 0.6679 after a ‘dovish, but not aggressively so’ RBNZ meeting. My BNZ colleagues note that the unchanged rates decision and tone of the Statement were very much in line with expectations – though there might have been some out there expecting slightly more aggressive language. The easing bias nevertheless was made clear in the statement : “a lower OCR may be needed over time”. Such an explicit line prompted some economists to bring forward their expected timing of the next rate cut from November to August; an August rate cut looks like a good bet and markets are 76% priced for this outcome.

The NZD also traded in sync with other commodity currencies with WTI Oil +2.4% overnight to $59.23 after a larger than expected inventory draw (EIA reported a draw of 12.8m barrels). Oil-linked currencies naturally higher: USD/CAD -0.5% to 1.3122 and USD/NOK -0.5% to 8.4937. AUD also supported, +0.4% 0.6986. Despite moves in oil-linked currencies, the USD was broadly unchanged given EUR was little moved overnight and USD/JPY was +0.5% to 107.80.

Yields were higher overnight with US 10yr yields +6.2bps to 2.05%. There was not a clear driver for the move and it is more likely it is due to squaring up ahead of the G20. Other factors that may have played a role were a poor 5yr auction, a higher oil price that lifted breakevens (10yr breakevens +2.4bps to 1.72%), and perhaps markets still digesting the latest thoughts from Fed officials. On the later the Fed’s Daly (non-voter) was out overnight repeating similar lines that there were “significant headwinds” and “let’s watch the next six weeks and see if the data reverses”. Markets continue to price the chance of a July rate cut being more than 25bps, with a July cut 122% priced and 2.8 cuts are priced by years’ end.

US data flow was mixed with US Durable Goods Orders soft on the headline (-1.3% against consensus of -0.3%), but better on the Core with orders less transportation whichup+0.3% against expectations of a +0.1% rise. Following the data the Atlanta Fed revised down the Q2 GDP growth estimate to 1.9% from 2.0%.

Finally, President Trump’s words above were from a wider-ranging interview on Fox news where he seemed to unleash on as many people as possible with as many hyperbolic statements as possible. Trump criticised EU regulators for their aggressive pursuit of antitrust cases against US companies, Vietnam for allowing Chinese goods to circumvent US tariffs by re-routing through that country, as well as jawboning the Fed again by stating Chair Powell was “not doing a good job” and that their policy was “insane”. For coverage of the interview see VOX.

Coming up

Datawise, it is a light APAC session ahead. NZ has the ANZ Business Survey for June, while Japan has Retail Sales and China Industrial Profits.

European session sees the German and Spanish CPIs (ahead of the wider Eurozone measure on Friday). Any miss on the CPIs will likely see markets anticipate further ECB action sooner rather than later. Consensus looks for German CPI at 1.3% y/y and Spanish CPI at 0.7% y/y. Also out are the Eurozone Confidence Indictors including Consumer and Business Confidence.

It is also a fairly light day from the US with a 3rd read on Q1 GDP (consensus 3.2%, up from the 2nd-estimate of 3.1%). Other pieces of data include Jobless Claims, Kansas City Manufacturing and Pending Home Sales

Market prices


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