NAB Morning Call

Yields push higher still, France’s political concerns ease, one more reason for BoJ to lift rates

Tuesday 2nd July 2024

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Treasury yields continue to rise. NAB’s Syke Masters says here are a range of factors at play ,but one is the seeming lack of concern on both sides of politics to address the US government’s rising deficit. In Europe concerns about a National Rally majority eased as almost 170 candidates withdrew from the second round election to avoid diluting opposition. A higher-than-expected index in the Tanken Large Manufacturing index in Japan provides another reason for the BoJ to lift interest rates. And the RBAA minutes will be scanned for suggestions about how seriously the potential of a rate hike was/is.

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Duration:: 13m
Broadcast on:: 01 Jul 2024
Audio Format:: mp3

Well, bond yields are pushing high. We'll look at why that is today. Politics might have something to do with it on both sides of the Aantic like concerns on rising debt in the United States and easing concerns perhaps about the far right in France. Maybe they won't win a majority in that second round of the weekend. We'll look at why that is. Plus more reasons for the Bank of Japan to lift rates and it's all going on in centra. The closest central banks get to a rock festival. It's Tuesday. It's the 2nd of July 2024. It's the morning call from Nav. Good morning. A small rise in the US dollar but a 0.4% fall in the end this morning. It hit a new low in this session. 161.7 yen to the dollar. The Aussie dollar. Well, it's sort of underperformed. It's down 0.3% to 66.6 US cents. Bond yields pushing higher. Again, another eight basis points on US tenure treasuries. Another 11 on tenure buns in Germany and 10 year guilts in the UK. Aussie 10 years. Well, there were up seven basis points yesterday to 4.38%. Eight basis points higher than that on futures overnight. More like 4.46% now. The NASDAQ is bounced back. It's up 0.7%. Just 0.1% for the S&P and the Dow. But they're all in the green at least in Europe. 3/4 of a percent higher for the Euro stocks. 50 at close, 1.1% for the CAT card and 0.3% for the Danks. The Futsi though, only just in the green and oil quite a bit higher. 2.3% more for WTI. Almost 2% for Brent, which is nearing 87 at barrels. So Sky Masters joins us today from now in Sydney. Been away for a while. She's back and our Bond guru. So she can tell us why yields are pushing so much higher today, Sky. Good morning Phil. The data that came out overnight doesn't really support this price action. If I look across my list of what's come out, most data prints, the final readings of PMIs across Europe all came in as expected. German CPI also as expected. And so you've seen a further easing in their annual rate on the harmonised measure that annual rate has dropped from 2.8 to 2.5. So you know everything moving in the right direction there. And then, you know, the off note, the US ICEM manufacturing report, as she came in below expectations, the index came in at 48.5 versus expectations of a small lift of 49. And the detail within that report showed some softness across production and a few other measures in employment as well. Yeah, prices were down there as well. So I mean that's a good sign. But all of that as you say, all of that points to reasons, doesn't it? For the Fed to be shooting, not obviously just on the Sean report, but be added to the evidence about why the Fed could think about going sooner and yet Bond yields are going the opposite direction from what you'd expect given that news. Yeah, definitely. So the data, I mean the data didn't necessarily support the market adding to rate cut expectations, but it sort of supported the markets pricing that the Fed could well begin there. They're easing cycle in September. If I look at US OS, OS pricing, the market's pricing, accumulative 17 base points of cuts for September and 27 for November and a total of 45 by the end of the year. So close to pricing in two cuts for the Fed this year. Now that didn't really shift much overnight. But as you've pointed out, we have seen a reasonable sell off or rise in Bond yields, US US twos as I currently look at them, they're up four basis points and US 10 years are up nine. And the sell off has been seen across the board and you've got 10 e-gilts closed up, 11 basis points and so did 10 e-bourns. So as you asked me, what's driving this rise in Bond yields, which is being long end led, I should say. So we continue to see steepening in yield curves, the US two year 10 year curve is currently at minus 30, having been around minus 50 only last week. And so if you look at what's going on in market pricing, I think there are a couple of things like that. The commentary is pointing to a reassessment, at least in the US, a reassessment on the political backdrop post that Trump Biden debated that we saw last week. Now I think there, it's more to do I think with the view that both parties didn't point to any sign that they were going to ease back on spending. So on the fiscal front, I guess continued spending and expectations of continued issuance of treasuries. So that is being seen as possibly weighing on market sentiment. And so you know that that more than who won the election, it wins. Because basically people watched their debate and thought, hang on the second two people here, not talking about what they're going to do about this rising deficit Yes. So it's the same in terms of whoever wins, although obviously the focus at the moment is is that it's possibly going to be a Trump Trump will win. But the way I, in terms of what I look when I'm looking at what's going on, I think it's a combination of a few things. And one being that the data at the moment out of the US and the data that printed overnight, as I said, it supports current market pricing that it didn't support the markets adding to record expectations. So the data is all pointing to that soft, currently that soft landing in the US inflation is heading lower. The Fed may well be able to start easing policy come September. And under that backdrop of two rate cuts this year, a US 10 year, which tried to push below 425 late last week, US 10 year down at 4% does start to look rich. So I think there's a combination of things going on here. And one is that yields are settling into a trading range. And until the data suggests otherwise, there's no valid reason why right here right now US 10 should be trading down at 4%. And I think that that's what you're seeing the markets is settling into this trading range. So for now, it does look like 425 is the lower the lower band. And I think we're probably not too far away from the upper end of that band. I don't see US 10s tracking too far above 450 provided that the market continues to price into rate cuts. And there's a bit more of a wouldn't say it's risk off, but a little less concern anyway, let's put it that way about the second round of the French election and news today is that basically everyone who's not in Le Pen's party is uniting to tactically withdraw. So 169 candidates, according to Le Monde have pulled out of their seats on Monday. The idea is that they don't want anyone to dilute the vote against Le Pen's party, the rally party. And so that may mean that they don't have enough seats. Well, if it works, they won't have enough seats to form a majority. So there might be a bit of market reaction to that happening as well right now, perhaps. Yeah, that's true. I mean, I think there sort of has been asset process at Probus showing and easing in concern on that front. And so I think you have seen the French-German wooden spread tighten. I think it's down at 74 basis points now compared to the recent peak of 86 basis points. But we've obviously got the next election this weekend, don't we? So yeah, that's what we're giving up for. Yeah, so it's interesting. Yeah, as I say, doing everything they can to make sure that they don't win. So we'll see. Anyway, that's all to come. China's vacation manufacturing PMI was marginally higher than expected yesterday. For June, it was 51.8. When I say marginal, that's up for 51.7, but it was expected to fall to 51.2. So there's growth there, but the yield on 10-year bonds in China at a two-year low now. And the PBOC is saying it's going to start borrowing soon to stabilize the prices. I mean, there's been speculation about this, but now the bank is saying that's actually what they're going to do. So I guess this is... People are just piling in, aren't they? Investors are just piling into bonds. I guess they've been burnt by real estate. And so they're plowing into the bond market. Yes, as you said, there's reports saying that the PBOC has said it wouldn't borrow government bonds from primary dealers to potentially sell into the market, to try and restrain or restrict further rally in those bonds. Yeah, I haven't said when they're going to do that, though. And I guess the Aussie yields overnight, eight basis points higher, just following the pattern from the United States and the rest of the world, I guess. Yeah, look, we are. I mean, I think we do... When you're looking at bond markets, you want to look at what's happening domestically, but you also have to have to keep an eye on what's going on offshore, because it does influence the direction of yields. So, yes, we are following U.S. Treasury yields higher, but we are outperforming. So the Aussie U.S. 10-year bond spread is now back below zero. On my reading, it's currently at minus one. So we are moving in the same direction, but we are outperforming because the driver of higher yields at the moment is being driven by what's going on sentiment in the U.S. And in Japan, well, is this another tick box for the Bank of Japan to lift rates there, the Tankan large manufacturing outlook in January was higher than expected. So for large manufacturers, 13, from two last time, 12 was expected, the outlook for these large manufacturers. So looking ahead, 14 up from 10, so very optimistic outlook. So, you know, if the Bank of Japan is looking for reasons to lift rates, there they are. Yes, yes. And this report is seen as a case to support another rate hike by the BHA. I think it's got its meeting later this month. So the yen is down quite a bit today as well, isn't it? So look, today, Europe, we get the CPI. We've talked about the RBA minutes are out today as well. The NZIER, Business Opinion Survey in New Zealand, jolts, job openings for the U.S. And the ECB central banking forum is underway in Sintra. The first talk, there's some interesting papers on the website. We've got us a bit of spare time today. The rise and fall of inflation in the euro area past, present and future. That's shared by Louis de Quindos for the European Central Bank, then geopolitical shocks and inflation shared by Isabel Schnabel. And then the panel, which is this afternoon, 230 in Sintra, that's very late tonight, that's got Jerome Powell and Christine Lagarde on it. So I don't know if they're going to say anything particularly revelatory. But anyway, entertaining value, if there's nothing on TV tonight, watch that. Definitely. And I think I think there have been a few ECB members already overnight sort of pushing back to back rate cuts and just showing a little bit of caution. So you know, as you say, I'm not sure if we're going to really get anything new, but we're always in this environment where the rate cut cyclist has already happened or is close to happening. We all want to know what central bankers are thinking. And on that front, yes, we do have the RBA June minutes out. Today, I guess probably not really going to get much new out of that. But I think there will be a bit of a focus on the wording around how strongly did the RBA talk about rate hikes? Will the market get a little bit more insight there or not? But that's I guess what investors will be focusing on. It just takes a few words as everyone goes crazy. So yeah, we'll read that very carefully today. Good to talk, Skye. Good to have you back. We'll catch you again soon. Thanks, Phil. And that's it. That's Tuesday morning on the Morning Call. I'm Phil Dobby for the Ab. I am back again tomorrow morning for Wednesday Morning's edition. That's tomorrow. I'll see you then. Thanks for listening in today.