Overnight Market Wrap

Summary: After reopened at $98/bbl following the roll, Brent crude (1st future) has increased to $102/bbl. Even so, in a volatile session, and after making new highs earlier, UST’s rally sharply with the 2yr yield down 9bps to 4.79% and the 10yr yield down 4bps to 5.24%. The US dollar strengthened, sending AUD and NZD to new lows. As of 3pm EST, the S&P500 was up 0.3%.

Currencies: The US dollar index (DXY) strengthened from 101.6 to 102.1, gaining ground especially as Treasury yields began to fall. EUR led the decline, falling from 1.1328 to 1.1240. By contrast, USD/JPY is little changed at 158.10 after rising in Asia yesterday following a disappointing Tankan report. AUD has remained relatively resilient but has nonetheless traded down from 0.6950 to 0.6926, via an earlier low of 0.6904. NZD has declined from 0.5626 to 0.5604 via an earlier low of 0.5594. AUD/NZD is little changed at 1.2359 having trading a 1.2333-1.2386 range overnight.

Commodities: Brent crude oil (1st futures contract) increased $4/bbl to $102/bbl on further reports that President Trump expects to resume bombing Iran by the end of November and that the US is sending 10,000 more troops and a third carrier strike flight to the Middle East. Copper futures fell 0.7%, iron ore fell 1.1% to just below $94 and gold futures rose 0.5% to $4177.

Interest rates

The US 2yr treasury yield initially made fresh highs earlier in the session, rising 4bps to a peak of 4.92%. But following a slightly weaker than expected US manufacturing ISM report, yields fell as much as 18bps at one stage and at 4.79% are currently 9bps lower than at the NZT close. Similar but slightly less extreme price action was seen in the long end, with the 10yr yield initially rising 6bps to a new 24-year high of 5.34%, before declining as much as 14bps at one point before settling at 5.24% (down 4bps on the NZT close). The 30yr yield is down 1bp to 5.61% having traded a 5.58-5.69% range. Markets now price around a 25% chance the Fed funds rate, currently 3.875% (mid), will be hiked by 25bp at the next meeting on 28 October (down from around 40% the previous day) but around a 100% chance of a hike by December.

Australian 3yr government bond yields (futures) have decreased from 4.98% to 4.93% (following an earlier high of 5.06%), while the 10yr yield fell from 5.41 to 5.39%. Markets price just under a 30% chance the RBA cash rate, currently at 4.60%, will be hiked by 25bp at the next meeting on 3 November, with a further hike fully priced by the 23 March meeting.

New Zealand rates markets price just under a 65% chance the OCR, currently at 2.75%, will be hiked at the next meeting on 28 October (down from 70% the previous day). Around one and half hikes priced by December.

Event Wrap

US: The ISM manufacturing index declined 0.1pts to 54.5 in September (market f/c: 54.9), but the new orders index rose 1.6pts to 55.3 and the prices paid index jumped 6.8pts to a 4-month high of 77.9. The S&P Global manufacturing PMI was revised down 1.1pts from its flash reading to 55.9, leaving it up 2pts compared with August. Construction spending rose a stronger than expected 0.9%mth in August (market f/c: 0.0%mth) following a revised decline of 0.1%mth in July (previously -0.5%mth). Weekly initial jobless claims were little changed at a low 197k (market f/c: 200k). Fed Vice Chair Jefferson said inflation risks were tilted to the upside but that it may take more time to determine whether further policy tightening is required, echoing previous comments from the NY Fed’s Williams. Minneapolis Fed President Kashkari said he continued to be surprised by the economy’s resilience, says that he didn’t have a strong view on an October hike (he had pencilled one more hike this year in his SEP contribution).

EUR: The unemployment rate was stable in August at 6.4% as expected. The S&P Global manufacturing PMI for September was revised up 0.2pts from the flash reading to 52.9.

Event Outlook

NZ: The ANZ consumer confidence report for September will likely begin to reflect the sharp rise in prices that occurred towards the end of the survey period (last: 98.0).

JN: The Tokyo CPI is expected to point to a lift in inflation in September (ex-fresh food/energy market f/c: 2.5%yr), while the unemployment rate is expected to have been stable in August (market f/c: 2.4%).

EUR: Higher energy prices point to a solid lift in the headline CPI inflation rate in September (market f/c: 3.7%yr) while the core CPI inflation rate is also expected to edge higher (market f/c: 2.5%yr).

US: The market expects a solid lift in non-farm payrolls (market f/c: 88k, whisper f/c: 80k). The unemployment rate is expected to remain stable (market f/c: 4.1%), as is growth in average hourly earnings (market f/c: 3.1%yr). Factory orders are expected to have increased only modestly in August (market f/c: 0.1%mth) given a flat reading for durable goods. Fedspeak includes commentary from Cook, Williams and Logan.

Market Outlook

AUD/USD 1 day: On the back of US dollar strength, AUD fell has fallen through the bottom of our expected 1-3 month range after yesterday’s CPI report. The AUD looks oversold (RSI) and June low (0.6926) should provide support.

AUD/USD 1-3 month: For the month ahead, the expected range is 0.6950-0.7275. AUD's shift in character argues for treating the upper boundary as aspirational for now, but all is not lost. Beyond one month, we expect a range of 0.7075-0.7375. Our AUD call still leans on a Fed that doesn't fully deliver what's priced, and an RBA that hikes (maybe even twice) over 1-6mths, broadly matching market pricing. Unexpectedly strong household consumption and an unprecedented data-centre buildout can keep growth close to the RBA's 2% potential, limiting disinflation and keeping them edgy. This argues for front-end yield support rebuilding, but the past week reminds that this path has a lot of volatile terrain: geopolitical headline risk and oil stressing US yields higher and creating global growth risks, and a more volatile AI picture stressing risk appetite. (25 September)

NZD/USD 1 day: The NZD has moved lower along with the AUD, taking out the June low (0.5625). As with AUD, looking oversold near-term (RSI). Last November’s low of 0.5581 should provide some support.

NZD/USD 1-3 month: For the month ahead, we retain a bearish bias, targeting sub-0.5700, with technical targets at 0.5680 and 0.5625 (June low). Domestic factors have been mixed, with the RBNZ indicating a restrained hiking path and economic activity indicators mixed. US factors have also weighed on NZD/USD, particularly the Fed outlook. The Fed started its tightening cycle in September and voiced intent on lowering inflation. Further ahead, though, if NZ economic momentum improves as we expect during the quarter ahead, we see a case for a NZD/USD recovery to 0.5900 by year end. (17 September)

AUD/NZD 1 day: AUS and NZ data today seems unlikely to provide clear direction.

AUD/NZD 1-3 month: AUD/NZD rose to fresh 13-year highs in September, caused mostly by a combination of stronger AU data (in turn causing RBA hike pricing to rise) and the perception that the RBNZ in September softened its hawkish stance slightly. However, at last week’s high of 1.2491 it was looking stretched (RSI) and in need of a corrective pullback to the 1.2200-1.2300 area before further meaningful gains. Unsurprisingly, therefore, AUD/NZD has fallen almost 1% to a low of 1.2375. The next major AU events will be the RBA decision on 29 Sep (over 90% priced to hike) and CPI data on 30 Sep. Longer term, we don't dismiss potential for a pullback towards 1.2000 by year end, but that would require a combination of much more compelling NZ economic data and a slowdown in AU economic momentum. (25 September)

AU swap yields 1 day: Relative to NZ closing levels, and reflecting the overnight moves in the US, the 3yr swap rate should open down around 4bps at 4.93% today, the 10yr down around 2bps at 5.47%.

AU swap yields 1-3 month: The 3yr swap rate rose to a 15-year high in September. AU CPI and GDP data were stronger than expected, encouraging markets to price more RBA tightening. While last week’s rising unemployment rate gave the market some slight scope to revise its most hawkish RBA scenario, labour market conditions are not sufficient to shift the level of hawkish rhetoric emanating from the RBA. Given the sharpness of September’s rise, some consolidation around 5.00% is warranted near term, while any further gains will hinge on the RBA decision on 29 Sep (90% priced to hike), and CPI data on 30 Sep. (25 September)

NZ swap yields 1 day: NZ swaps are likely to open slightly lower today in line with the overnight moves in the US market, 2yr swap down around 3bps at 4.05% and 10yr swap down around 2bps at 4.80%.

NZ swap yields 1-3 month: In September the 2yr swap rate in broke well through its two-month-old range of 3.60%-3.80%, driven by gains in other countries’ bond yields, and reached a high of 4.14% last week – the highest since August 2024. Our economists expect the nascent NZ economic recovery to continue, which should result in an upward trend in swap rates during the next few quarters. That said, should worries in the oil market suddenly recede, swap rates would likely fall materially from current levels in the near term. (25 September)

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