The strongest to weakest of the major currencies
The JPY is the strongest and the NZD is the run-away weakest of the majors as the North American session begins. The NZD has tumbled lower after the RBNZ raised rates by 25 basis points, with debate between unchanged and a 25 basis point hike (the vote was 5-2 for the hike). The USD is higher with most of the gains coming vs the NZD, but there was also flight to safety flows into the relative safety of the USD and the JPY vs other currencies.
The stalemate over the U.S. debt ceiling continues to raise fears in the markets of a potential default, as another round of unproductive talks between representatives of President Biden and House Speaker McCarthy took place over the $31.4 trillion debt limit. This political gridlock and imminent fiscal crisis cast a shadow over Wall Street, causing U.S. stock futures to slump overnight (Europe stocks are lower helped by higher inflation in the UK as well), further rattling an already anxious global market. Later today, investors will be eagerly awaiting the release of the Federal Reserve ‘s meeting minutes for hints about the future interest rate path. As policymakers continue their debates over the possible halting of the rate-rising cycle, attention is also being drawn toward Ron DeSantis’ impending announcement of his 2024 presidential bid during a Twitter conversation with Elon Musk. Additionally, concerns over tightening supply conditions boosted crude oil prices, fueled by industry data showing a steep drop in U.S. inventories (draw of -6.799M barrels vs expectations of a small build of 0.775M est. for inventories today), and speculation that OPEC and its allies may cut production in June. US yields are lower at the further end of the yield curve (by a couple of basis points), while the 2 year yield is unchanged. Traders are torn between flight to safety flows, and concerns about less demand as a result of default risk increasing as Washington battles. The White House and GOP negotiators are set to resume debt talks this morning. Stay tuned.
In overnight developments in the Asian Pacific session, the Reserve Bank of New Zealand (RBNZ) raised rates by 25 basis points to 5.5%. In their statement, they committed to maintaining restrictive interest rates for the foreseeable future to ensure a return to the 1-3% annual inflation target range, while also supporting maximum sustainable employment. This decision comes in response to weak global economic growth, easing inflation pressures, and easing supply chain constraints. New Zealand’s inflation is anticipated to decline from its peak, but core inflation pressures will persist until capacity constraints lessen further. Despite employment being above its maximum sustainable level, labor shortages are reportedly easing. Consumer spending growth and residential construction activity have declined, while businesses report a decrease in demand for their goods and services. The reopening of international borders has led to an influx of immigration, which is expected to ease back to pre-COVID-19 levels, contributing to the uncertainty of its net impact on overall spending. However, the recovery in tourism spending and the rebuilding efforts in the North Island due to severe weather events are expected to support economic activity. In his press conference, RBNZ Governor Adrian Orr indicated satisfaction with the latest data, recognizing the long journey the bank has navigated in its decision-making. In a first, the monetary policy committee moved to a vote over the policy decision, a signal of potential divergent views. The vote was 5-2 in favor of the hike (2 voted for unchanged). Orr also highlighted that the outlook for fiscal spending appears to be contractionary on demand, implying that less government spending could dampen economic activity. He further stated that the Reserve Bank of New Zealand expects to maintain a restrictive monetary policy for a while, suggesting that interest rates could remain high to contain inflation. Orr also forecasted that the surge in immigration will ease, which could have implications for the labor market and overall economic growth. Shifting labor market dynamics were also underscored, with Orr noting that the issue was no longer about labor shortages, but rather about demand shortages. These sentiments were echoed by RBNZ Chief Economist Conway, who also remarked that pressure in the labor market is easing. Overall, the comments reflect a cautious approach by the RBNZ as it navigates evolving economic conditions.
In today’s European session, significant data was released pertaining to both the British pound (GBP) and the euro (EUR). In the UK, inflation rates exceeded expectations, with year-on-year Consumer Price Index (CPI) at 8.7%, against a forecast of 8.2% and a previous of 10.1%. Core CPI, which excludes volatile goods such as energy and food, also rose more than expected at 6.8% y/y (vs 6.2% est). The Retail Price Index (RPI) year-on-year likewise outpaced forecasts, hitting 11.4% against the anticipated 11.1%. In terms of producer prices, the Producer Price Index (PPI) Input came in below expectations at -0.3% on a monthly basis, while PPI Output was flat at 0.0%. The House Price Index (HPI) y/y revealed an increase in UK housing prices by 4.1%, lower than the 5.2% forecast.
For the Eurozone, specifically Germany, the ifo Business Climate Index slightly underperformed against expectations, reporting a value of 91.7 compared to the predicted 93.0. The index is an important economic indicator for the German economy as it reflects the current sentiment among German businesses. This underperformance indicates that German businesses are less optimistic about the current business climate than anticipated. Overall, today’s session revealed inflationary pressures in the UK and a somewhat subdued business climate in Germany.
A snapshot of the market’s are showing:
- Crude oil is trading up $1.221 or 1.20% at $74.12
- Gold prices are up $7 or 0.35% at $1981.73
- Silver is unchanged at $23.43
- Bitcoin is trading down at $26,733. At 5 PM yesterday the price was trading around $27,230
In the premarket for US stocks, the major indices are trading lower for the 2nd consecutive day. The futures are implying:
- Dow industrial average is down -104 points after yesterday’s -231.07 point decline
- S&P index is down 13.83 points after yesterday’s -47.05 points:
- NASDAQ index is down -42 points after yesterday minus 160.53.2 point
in the European debt market the major indices have tumbled lower for the 3rd consecutive day:
- German DAX -1.60%
- France CAC -1.72%
- UK’s FTSE 100 -1.72%
- Spain’s Ibex -1.26%
- Italy’s FTSE MIB -2.20%
in the US at that market, the yields are unchanged to down:
- 2 year 4.283% unchanged
- 5 year yield 3.732% -1.6 basis points
- 10 year yield 3.670% -2.7 basis points
- 30 year yield 3.919% -3.2 basis points
in the European debt market, the benchmark 10 year yields are mixed, with UK yields higher after higher inflation:
European benchmark 10 year yields