Trading activity has been light overnight as markets await Fed Chair Powell’s annual address at Jackson Hole this evening. Global rates have had a decent move lower, reversing some of their recent surge higher, although the US 10-year rate continues to sit above the 3% mark. Equity markets are higher while the NZD and AUD have outperformed against a slightly more positive tone to risk appetite, the NZD back above 0.62 this morning. Ahead of Powell’s key speech tonight, RBNZ Governor Orr will be speaking with Bloomberg this morning.
Market attention remains focused on Fed Chair Powell’s Jackson Hole address, which takes place tonight. The consensus is that Powell will hammer home the Fed’s commitment to get inflation back to 2% and signal the tightening process still far from done. WSJ journalist Timiraos, seen as close to the Fed, wrote earlier this week that Powell was “likely to err on the side of raising rates too much, rather than too little, because tolerating excessive inflation would represent a much greater institutional failure for the central bank”, citing unnamed former Fed officials.
There has been the usual set of interviews with Fed officials ahead of Powell’s keynote address, although there hasn’t been anything particularly new in the comments (still sounding hawkish) and the market hasn’t shown any reaction, instead waiting on Powell. Kansas City President George said a cash rate above 4% was not “out of the question” while Philadelphia Fed President Harker reiterated “our job is no way done”, despite some “glimmers of hope on inflation.” Atlanta Fed President Bostic said he saw the decision between hiking 50bps or 75bps at next month’s meeting as a “coin toss ”, much like market pricing, to be settled by data outturns over the next month. St Louis President Bullard, one of the most hawkish on the committee, reiterated his preference to get the cash rate to 3.75%-4% by year-end, adding the Fed may need to keep the cash rate “higher for longer”.
US rates have shrugged off the hawkish talk, with Treasury yields 2-8bps lower across the curve, with some investors closing out short positions ahead of Powell’s speech. The US 10-year rate is 8bps lower, at 3.03%, more than reversing the previous day’s move. A very strong 7-year bond auction played a part in the falls in US rates. Likewise, equities markets are higher, albeit on low trading volumes, with the S&P500 and NASDAQ up by 0.7% and 0.9% respectively overnight.
US Q2 GDP growth was revised up marginally, to -0.6% (q/q%, annualised), on the back of an upward revision to private consumption. While US GDP notionally contracted in both Q1 and Q2, meeting a definition of a ‘technical recession’, an alternative measure of economic activity, gross domestic income (GDI), was positive in both quarters, rising at a 1.4% annualised rate in Q2. We’d take more signal from GDI in this case, especially given the strong pace of employment growth over the first half of the year, not something one would expect to see in a ‘proper’ recession. Markets remain more concerned about the risk of recession next year, as per the inverted US yield curve, given the aggressive pace of rate hikes among global central banks and the risk of gas shortages in Europe.
On that note, European gas futures continue to blast higher, up another 10% overnight to a fresh record high, exacerbating already extremely elevated inflationary pressures in the region. The German IFO index was largely unchanged in August, at 88.5, not as bad as feared but still its weakest reading since mid-2020 (and, before that, 2009), highlighting the recessionary backdrop in Europe.
The key takeout from the minutes to the ECB’s last meeting was that a European recession won’t necessarily prevent further rate hikes. The minutes noted “even a recession would not necessarily diminish upside inflation risks, especially if it was related to a gas cut-off”. “A very large number” of members backed the 50bps hike in June, mainly because of inflation concerns. The market prices around 100bps of hikes from the ECB over the next two meetings, including some chance that it could raise its cash rate by 75bps next month. Given the importance the ECB has placed on realised inflation outturns, next week’s CPI release is likely to be crucial in influencing market expectations for the September meeting. The EUR tried to rally overnight, but its push above parity was short lived, now back at 0.9970, unchanged on the day.
Despite mounting economic headwinds, China continues with its cautious approach to policy easing. The State Council yesterday announced another ¥300n (~0.1%/GDP) of funding which state banks can use to fund infrastructure projects. However, the readout from the meeting gave the clear impression that there wouldn’t be a major fiscal stimulus anytime soon, saying there would be “no flooding of easing measures and no overborrowing from the future.” The Chinese growth slowdown, related to the downturn in the heavily indebted property sector and the country’s ongoing zero-Covid policy, is part of the global recession risk narrative.
Currency moves have generally been modest ahead of Powell’s Jackson Hole speech, the BBDXY USD index just 0.2% lower on the day. The BBDXY index remains near its highest level in more than 10 years. USD/JPY is 0.5% lower amidst the falls in US Treasury rates, now back to around 136.50.
The AUD and NZD have outperformed, up 1% and 0.7% respectively from this time yesterday against a backdrop of slightly more positive risk appetite, the NZD trading back above 0.62 this morning. Assisting the upwards move in the NZD and AUD has been a stronger CNY after the PBOC set the fix at a much stronger-than-expected level yesterday, a signal that the authorities might be getting uncomfortable with the pace of depreciation. The CNY is around 0.2% stronger over the past 24 hours, albeit from what was its lowest level in two years. The NZD/AUD cross is set for its lowest close since 2017, at around 0.8920, not helped by the dire NZ retail sales release yesterday.
NZ retail sales data for Q2 was a shocker, with real (i.e. inflation-adjusted) sales falling 2.3% on the quarter, much weaker than the +1.7% market consensus. The down-cycle in the housing market looks to be having a bearing on overall spending trends, with notable declines in spending volumes on big ticket durable goods items over the quarter. We’re still pencilling in a decent rebound in economic activity in Q2, owing to a post-Omicron and post-border reopening bounce back, but we still shaved our estimate for quarterly GDP growth from 2% to 1.5% after the data (the RBNZ’s MPS projection was for 1.8%). We get an update on the state of consumer confidence this morning with the release of the ANZ index.
The weak retail sales release helped anchor shorter-term NZ rates yesterday, even as longer-term rates followed offshore markets higher. The 2-year swap was 2bps higher, at 4.19%, its highest close since June, while the 10-year rate was up a chunky 7bps, to 4.08%. Market pricing for the OCR over the next 24 months remains very close to the RBNZ’s most recent projections, with a peak in the cash rate of around 4.15% priced in by mid next year. We should see a reversal in NZ rates this morning given the overnight moves in US Treasuries.
In the day ahead, RBNZ Governor Orr will be interviewed by Bloomberg this morning (from Jackson Hole) at 10:30am. The message from the RBNZ since the MPS, which we’d expect Orr to reiterate today, is the Bank expects to take the OCR to 4-4.25% and then be “patient” leaving the cash rate at that restrictive level for an extended period. But all eyes are on what Powell has to say tonight.
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