Global equities are consolidating the large move from the previous week with the S&P up 0.2% in early afternoon trading amid a quiet economic calendar. The US Dollar has made broad-based gains while global bonds are lower in yield. In commodity markets, oil prices have fallen close to 3%, to the lowest level in more than 3 months, on concerns about global growth following weak Chinese trade data.
Comments by US Federal Reserve officials emphasised that bringing inflation lower to 2% is its primary goal. However, Chicago Fed President Austan Goolsbee said he didn’t want to pre-commit to whether further rate hikes would be required. Minneapolis Fed President Neel Kashkari said the ‘Fed would do more on rates if needed’. Market pricing continues to indicate a less than 10% chance of a 25bps rate hike at the December FOMC.
German industrial production fell for the fourth consecutive month. The 1.4% m/m fall was larger than expected. The manufacturing sector is under pressure from high energy prices, the rise in interest rates and the slowdown in China.
Chinese imports grew 3% y/y in October in US dollar terms which was the first increase since February. Meanwhile, exports dropped for the sixth consecutive month. The economic recovery remains fragile in China and is set against the backdrop of weak consumer and business sentiment. Manufacturing and services PMIs were below expectations in October and at levels consistent with subdued activity.
The Reserve Bank of Australia increased its policy rate by 25bps to a 12-year of high of 4.35% which was in line with expectations. Inflation projections were revised higher to 3.5% by end-2024 and the peak unemployment rate was reduced marginally. The accompanying statement seemed to temper the RBA’s tightening bias outlining ‘whether further tightening is required to ensure that inflation returns to target in a reasonable timeframe will depend on the data and the evolving assessment of risks’.
Given the revision to the RBA’s economic projections, we expect one further 25bps rate hike in February. The RBA will release its full suite of forecasts in the Statement on Monetary Policy on Friday. The market reduced the probability of further tightening following the meeting contributing to a sharp fall in the AUD and a rally in ACGBs.
US front end treasuries are little changed while 10-year bonds are close to 6bps lower in yield contributing to a flatter yield curve. The 2y/10y curve has retraced to -35bps from the recent highs of -15bps in late October as the curve steepening move has lost momentum. Bloomberg reported that estimated annual interest payments on US Government debt have risen to US$1 trillion. This has doubled over the 19 months and represents about 16% of the Federal budget in the 2022 fiscal year.
The US dollar made broad based gains partially unwinding the weakness from last week following the FOMC and weaker than expected US labour market report. The RBA decision weighed on the AUD, and it is down close to 1% against the dollar and weaker on the crosses. The Norwegian Krone was the weakest performing G10 currency following the slide in oil prices.
The NZD continued to move lower in offshore trade taking its cue from the stronger US dollar backdrop and the weaker AUD. NZD/USD is almost a big figure below the highs above 0.6000 reached on Monday. NZD/AUD extended the post RBA gains and traded above 0.9230 in offshore trade.
NZ government bond yields ended higher in yield in the local session yesterday reflecting the moves in offshore markets. 10-year government bond yields increased 4bps to 4.20%. There was a further flattening in the 10y/30y curve which closed at 10bps. Swaps outperformed relative to bonds with the 10-year edging up 1bps.
New Zealand Local Government Funding Agency (LGFA) is tendering NZ$150m of nominal bonds split across 15 May 2027 ($50m), 20 April 2029 ($50m) and 14 April 2033 ($50m).
The RBNZ’s survey of expectations is released today with the market focused on the inflation component. 2-year ahead inflation expectations were stable at 2.8% in Q3. There is no data of note on the international economic calendar.
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