Much weaker than expected US initial jobless claims figures triggered lower US Treasury yields and a weaker USD, although moves have been modest. The BoE signalled a rate cut was soon coming

Overnight, much weaker than expected US initial jobless claims figures triggered lower US Treasury yields and a weaker USD, although moves have been modest.  The BoE signalled a rate cut was soon coming, something the market was largely prepared for. The broadly weaker USD sees the NZD push up through 0.6030. While global equity markets saw modest gains, key Europe and UK indices rose to fresh record highs.

The recent run of weaker US economic data has continued, sending Citigroup’s US economic surprise index – which tracks economic surprises on a moving average basis – to a fresh 15-month low. Initial jobless claims rose a hefty 22k to 231k, the largest weekly increase since last June and the highest level since August. Half of the increase came from New York, which could suggest that one-off factors were in play, but other indicators of job-layoffs have been suggesting a lift for some time.  The market will need a few more weeks of data to be convinced that the unemployment rate could be on the verge of rising in a more meaningful fashion, but it was still prepared to take rates and the USD lower following this data print.

That said, market movements haven’t been particularly significant. US Treasury yields are down 3-4bps for the day, but from the NZ close the 10-year rate is down about 6bps to 4.45%. Treasuries were further supported after the results from the $25b 30-year bond auction were released, showing the deal was well supported, printing 1bp below the prevailing yield. Some 46bps of easing is now priced for this year, up slightly from 44bps, with the first full cut still not priced until November.

The BoE left its policy rate unchanged, as expected, but signalled that rate cuts were coming.  Switzerland and Sweden have already kicked off their easing cycle, soon to be followed by the ECB next month, and it looks like the BoE could be soon after.  Based on market rates, which already encompassed rate cuts, the BoE projected CPI inflation to be below target of 1.9% in two years and 1.6% in three years. The MPC voted 7-2, with two members prepared to ease policy immediately, with Deputy Governor Ramsden joining perennial dove Dhingra in voting for a cut.

In new language, the Committee said it “will consider forthcoming data releases and how these inform the assessment that the risks from inflation persistence are receding”. At the press conference, Governor Bailey said a June rate cut was neither “ruled out” or a “fait accompli”, adding “It’s likely that we will need to cut bank rates over the coming quarters… possibly more so than currently priced into market rates.”

Despite Bailey’s dovish signals, the market was not prepared to read too much into them and only took rates down slightly. The June meeting is priced for a 15bps cut (from 14bps yesterday), 28bps by August (from 26bps) and 62bps by year-end (from 57bps). GBP fell to around 1.2445, before the weaker USD leg post the jobless claims report took over, taking GBP modestly higher for the day to 1.2525.

The USD DXY index is down 0.3% on the day. The NZD and AUD have been two of the strongest currencies, although gains have been modest. The NZD is trading close to its high for the day, just up through 0.6030, while the AUD has pushed up towards 0.6620. NZD/AUD has nudged down to 0.9115.  NZD/GBP has pushed up to a two-month high and is currently 0.4815.  NZD/EUR has edged towards 0.56. A weaker USD has taken some pressure off the soft yen, seeing USD/JPY flat at 155.50, while NZD/JPY has risen to 93.8.

US equity markets continue to push higher, with the S&P500 up 0.4% and edging towards the record high in March. The Euro Stoxx 600 index rose 0.2% to a fresh record high, and that milestone was also reached for the FTSE100, up 0.3%. Locals won’t need reminding, but NZ equities are moving in the opposite direction, falling for the fourth consecutive day yesterday.  Cyclical stocks are struggling against the backdrop of the economic recession, with investors sensing more economic pain to come.

Yesterday, global forces sent NZ rates higher, with NZGB yields up 7-8bps, breaking the downward trend in yields in play since late-April. The tender was well supported, with better coverage ratios for the longer-term bonds on offer.  All three lines were cleared below prevailing mids, although there was no follow-through in market trading after the tender. In the swap market, the 2-year rate rose by “only” 4bps, to 5.04% while the 10-year rate rose 7bps to 4.63%.

On the calendar data, NZ manufacturing PMI is released, and we’ll be watching to see if the more than year-long run in contraction territory sub-50 is sustained. UK Q1 GDP is expected to show the economy recovered at the start of 2024, with the consensus at 0.4% q/q, the strongest in two years. In the US, University of Michigan consumer sentiment and inflation expectations data will be released while on Saturday, China will release inflation data.