Recession fears continue to dominate the markets today. A weak ISM manufacturing survey on Friday evening heightened investor fears about global growth, contributing to another sharp drop in global rates, with the US 10-year yield falling further below 3%. Industrial commodity prices also fell on demand concerns, with copper prices now 25% below recent highs. Amid risk aversion and an overall stronger dollar, the NZD breached key support at 0.62 on Friday, hitting a two-year low, before falling back to that level at the close of trading. markets. New Zealand yields saw steep declines on Friday, and they are expected to extend those moves as markets open this morning.

The ISM manufacturing survey was weak, with the index falling from 56.1 to 53, its lowest level since mid-2020. The key new orders sub-index fell into contractionary territory (49.2 from 55.1) while the employment index fell further below 50, suggesting manufacturers are slowing hiring. There were also signs of easing supply chain pressures, with supplier deliveries and order books both hitting their lowest levels since 2020. The weaker-than-expected ISM survey follows data disappointing U.S. consumer confidence and consumer spending last week, which fueled concerns about U.S. growth. risk of recession.

Global rates, which had already fallen significantly before the ISM survey, fell further after the data was released. The US 10-year yield fell to 2.79%, 22bps lower on the day at one point, before rising to 2.88%. Weak liquidity conditions ahead of the long weekend in the US likely exacerbated the moves. Other bond markets also saw significant (downward) moves, with the UK 10-year rate down 15bps and the German 10-year rate down 10bps, capping a drop. returns of 40 basis points in just three sessions.

The market maintains an aggressive near-term rate hike profile for the Fed, with around a 70% chance of a 75 basis point hike scheduled for the meeting later this month, consistent with recent messages from Fed officials. the Fed. But the market has moved towards an increasingly aggressive rate cut profile for the Fed in 2023 and 2024, consistent with a growing risk of recession. About 60 basis points of Fed cuts are now priced in for 2023.

Like bond markets, commodities also suggest that the market is increasingly concerned about the risk of recession. Copper, often seen as an indicator of global economic activity, fell 2.5% on Friday, leaving it about 25% off its peak reached in early March, while nickel fell 3.9%. Wheat futures were down 10% last week and are now trading below where they were before Russia invaded Ukraine, despite fears the war could severely disrupt markets. supplies. Oil prices, on the other hand, were slightly higher last week. JP Morgan’s research team released a note suggesting oil prices could reach $380 a barrel in a scenario where Russia retaliates by cutting production by 5 million barrels per day.

In other economic data, European headline inflation hit a new high of 8.6% year-on-year in June, well up from 8.1% the previous month and slightly above market expectations. . By contrast, core inflation was weaker than expected at 3.7% year-on-year, although the downside surprise was likely related to Germany’s recently announced public transport subsidies rather than an easing of underlying inflationary pressures. With inflation well above ECB forecasts, the market expects a 25 basis point hike later this month and a 50 basis point hike in September. The market barely reacted to the data as investors’ attention shifted to recession risk. The German 2-year rate was down 13 basis points on Friday, to 0.52%, and is now around 80 basis points from its highs of just over two weeks ago.

Despite the flow of negative news and generally pessimistic market sentiment, US equities rebounded on Friday, with the S&P500 rising 1.1% and the NASDAQ managing a 0.9% rally. Despite everything, equities fell over the week, by 2.2% on the S&P and 4.1% on the NASDAQ, in line with the deterioration of growth signals coming from other asset classes.

In the FX market, the USD strengthened overall amid risk aversion, with the BBDXY index rising 0.3%. Both the AUD and NZD fell to two-year lows, with the latter breaching key support at 0.62 in our time zone amid a deteriorating risk backdrop and falling commodity prices. The NZD fell to around 0.6150 during the overnight session before rallying back above 0.62 at the close of trading, still down around 0.6% on the day. The AUD was the hardest hit, with the NZD/AUD cross rising above 0.91 by the end of the week. The two antipodean currencies were down almost 2% last week. The JPY was the only G10 currency to appreciate against the USD on Friday, gaining 0.4%, amid sharp declines in US Treasury yields.

Continuing the streak of appalling New Zealand survey data, the ANZ Consumer Confidence Index fell further in June, to just 80.5, its second lowest reading on record. Several factors are weighing on consumer confidence at present, including high inflation, sharply rising mortgage rates and falling house prices. Combined with pessimistic business survey activity indicators and deteriorating global growth indicators, all point to a high risk of recession in New Zealand over the next year. Elsewhere, building permits in New Zealand fell in May (albeit from very high levels) and we expect residential investment to decline over the next 12-24 months in response to the slowing housing market. lodging.

New Zealand yields were significantly lower on Friday and the yield curve steeper, in response to global forces. The 2-year swap rate is down 17bps to 3.90%, its lowest level in almost a month, as the market brings its terminal OCR expectations back below 4%. The 5-year and 10-year swap rates were 14 basis points and 12 basis points lower, respectively, moves similar in size to those in Australia during the New Zealand trading session. With global rates having fallen significantly further since the New Zealand market closed, local rates are likely to extend their recent declines as markets open this morning.

It should be a quiet session ahead given the Independence Day holiday in the US. As with the rest of the week, the Nonfarm Payrolls report comes Friday evening, where the market is looking for another robust print of 273,000 monthly payrolls and the unemployment rate stable at an ultra-low 3.6% . The ISM services index, released Wednesday evening, is expected to fall to 54, which would be its lowest level since mid-2020. Closer to home, the RBA is set to raise its cash rate by 50 basis points at its meeting tomorrow, with the market pricing at 44 basis points and 25 of 26 economists expecting such a move. Locally, the highlight is tomorrow’s QSBO business survey, which will likely reveal struggling activity indicators, but lingering labor market tightness and elevated inflationary indicators.

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