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NZD/USD hits three-week high

Global stock markets posted strong gains on Friday. Weaker-than-expected US labor market data combined with a soft services ISM pointed to a moderation in economic activity, rekindling hopes for Federal Reserve rate cuts later this year. The S&P gained 1.2%, its biggest advance in more than two months. US Treasury yields fell sharply after the data but recovered from lows, while the US dollar was weaker against G10 currencies.

U.S. nonfarm payroll costs rose by 175,000 in April. This was well below the consensus forecast of 241,000, and the smallest increase in six months. In addition, revisions deducted 22,000 from the previous two months. The unemployment rate rose to 3.9% from 3.8% in March. Earnings growth was weaker than expected, rising 0.2% in April, compared with forecasts for a rise of 0.3%. This brought the annual increase to 3.9%, the lowest in almost three years.

The ISM services sector unexpectedly entered contraction territory for the first time since December 2022, as activity and new orders weakened. The index fell to 49.4 from 51.4 in March, compared with a forecast increase. Most of the decline in the overall index can be attributed to a sharp decline in the business activity index, which fell to 50.9, the lowest level in four years. The prices paid sub-index was much higher than forecast, rising to its highest level since June.

The payrolls and ISM data continue a recent run of weaker than expected activity data. Citi’s economic surprise index, which measures actual numbers versus expectations, has fallen sharply since mid-April and is now below zero. The market is pricing in about 45 basis points of Fed rate cuts this year, compared to a low of 25 basis points ahead of last week’s FOMC.

U.S. Treasury yields fell for the third straight session. 2-year bonds traded 4.85% higher on the numbers, bottoming out intraday at 4.70% before recovering to close up 6 basis points at 4.82%. Sentiment in the Treasury market has improved since the Fed maintained a dovish stance at the May FOMC, with two-year yields well below a peak of 5.04%. The yield on ten-year government bonds fell by 7 basis points to 4.50%. The government bond market is now looking ahead to this week’s supply.

The US dollar fell sharply after the labor market data. At one point, the dollar index (DXY) fell almost 0.7%, but then bounced back to end 0.2% lower. The recovery in the DXY corresponded with higher government bond yields, which received an additional boost following the rise in the services ISM sub-index. USD/JPY traded below 152, 5% below Monday’s peak last week, before closing around 153.

NZD/USD spiked to 0.6045 – a three-week high – after the payrolls data. The subsequent retracement was less than that of other G10 currencies, leading to an outperformance against the major cross rates. NZD/GBP and NZD/EUR were trading near one-month highs at 0.4800 and 0.5600 respectively. NZD/AUD posted modest gains and briefly traded above 0.9100, albeit within the context of a well-anchored downtrend.

New Zealand fixed rates rose during the local session on Friday, largely due to directional moves in offshore markets. At one point the 2-year swaps were trading below 5%, but then rose to close down 4 basis points at 5.01%. The decline across the swap and sovereign curves was parallel and of similar magnitude. Ten-year government bonds closed at 4.83%, down 4 basis points on the day, and at the lowest yield level in three weeks.

Australian 10-year government bond futures are down ~2 basis points in terms of yield since the local close on Friday, suggesting New Zealand yields are on a modest downward trend to start the week.

There is no domestic data today. Caixin serves PMI in China, the only major release on the international calendar.

(chart; daily exchange rates)