JGBS: Cash Bonds Slightly Richer

Monthly price data was mixed in May with food, power, accommodation and alcohol seeing a rise in inflation, while air travel, rents and petrol fell. The series released account for 46.5% of the quarterly CPI with Q2 due to be released on July 21, which the RBNZ expects to rise 0.5% q/q & 2.6% y/y. June monthly indices print earlier on July 17. RBNZ and NZIER compiled consensus accept a near-term pick up in inflation but continue to have it returning to the mid-point of the 1-3% target band. 

• Food prices rose 0.5% m/m to be up 4.4% y/y up from 3.7% y/y in April. They have been trending higher since the June 2024 trough of -0.3% y/y. There has been a sharp increase in annual dairy and beef inflation. Groceries fell 0.7% m/m to be steady at 5.2% y/y in May.

NZ inflation y/y%

• Existing rents rose 0.1% m/m to be up 2.8% y/y, lowest rate in over 10 years and a moderation from April’s 3.0%. They have been trending lower since reaching 4.6% y/y in May 2024.
• Petrol prices fell 2.7% m/m, the fourth consecutive monthly decline, to be down 9.4% y/y after -9.2% in April. This component should put downward pressure on Q2 headline inflation.

NZ inflation y/y%

Source: MNI - Market News/Statistics NZ

• Power prices were higher though with electricity up 2.3% m/m & 8.7% y/y after 6.2% y/y and gas +0.7% & 15.4% down slightly from April’s 15.8%. They have been trending higher since November and August 2024 respectively.
• Both domestic and overseas air travel were down sharply in May after a strong rise in April to be down on the year, but accommodation rose to be 5.6% y/y higher up from 4.4%.

TYU5 is trading 110-20+, up 0-05 from its close. 

• The US 2-year yield opens around 3.945%, down 0.02 from its close.
• The US 10-year yield opens around 4.43%, down 0.02 from its close.
• MNI - Former Fed Board of Governors economist Joseph Gagnon expects the FOMC to be on hold all year as inflation rises more than unemployment. “They may still show one or two more cuts this year in the dot plot because they don’t want to change that yet,” he said. “By early next year, inflation should be heading down and unemployment still creeping up, so they will be able to cut.” Lockhart also wouldn’t rule out the possibility that the Fed does not cut at all this year.
• US President Trump has posted on Truth Social, stating that Iran should have signed the deal he told them to sign, while also re-iterating that Iran cannot have a nuclear weapon. He also noted that everyone should evacuate Tehran immediately.
• The 10-year yield has bounced strongly off its 4.30/35% support, this area needs to hold if yields are to move higher. The range looks to be 4.30% - 4.60% for now a break either side would provide a clearer direction. It seems traders for the moment are more concerned with the move in oil and the implications it has for inflation and the FOMC this week than buying treasuries as a safe haven.
• Data/Events: Retail Sales, Industrial Production, Business Inventories, NAHB Housing Market Index

Risk sentiment has stayed on the backfoot following earlier remarks from US President Trump - via Truth Social he stated that everyone in Tehran should evacuate immediately. Since then it has emerged that US President Trump will leave G7 meetings in Canada early and head back to Washington. Headlines have also crossed that Trump has requested the National Security Council be prepared in the Situation Room - per Fox News (via Rtrs). China has also warned its citizens in Israel to leave the country as soon as possible as the security situation becomes more severe (via RTRS). 

• US equity futures continue to track lower, last off close to 0.60% for Eminis, while WTI is up over 2% to $73.40/bbl in latest dealings. Gold is above $3400/oz, +0.50% versus end Monday levels in the US.
• In the FX space, we are seeing higher beta plays like AUD and NZD down around 0.20%.
• US Tsy futures are firmer. TY is +04.
• The earlier Trump around evacuation of Tehran is leaving markets on edge in terms of how the situation in Iran may unfold.