Bond markets have been supported by some market-friendly data, extending the recent rally and seeing the US 10-year rate fall to as low as 4.25% overnight. Aided by a stronger USD overnight, the NZD has reversed yesterday’s post-MPS rally, after the RBNZ’s surprising forecast update which showed an increased chance of tighter policy and a higher-for-longer rate track. NZD/USD is trading back around 0.6150.
There has been plenty of news to digest over the past 24 hours. Beginning with overnight events, global rates have continued their downward trend, extending the big rally in bond markets we’ve seen during November. The move has been supported by weaker CPI inflation data in Europe and a ”goldilocks”-like revision to US GDP data. Also, Fed Governor Waller’s comments the previous day that the Fed could be easing within 3-5 months if inflation keeps falling remains forefront of mind for investors.
Germany’s 10-year rate is down 6bps to 2.43% and UK’s 10-year rate is down 8bps to 4.10%. The US 10-year rate fell to as low as 4.25%, and is 4.28% as we go to print, down 4bps on the day. The curve has steepened further with the 2-year rate down 8bps to 4.65%.
Inflation data for Spain and Germany were much lower than expected, with annual CPI inflation falling to 3.2% y/y in the former and to 2.3% y/y for the latter. The softer data suggest downside risk to estimates for euro area CPI data released tonight and supports the market view that the ECB is finished hiking for the cycle.
US GDP was revised up from an annualised 4.9% to 5.2% in the Q3 but the mix was market friendly, with private consumption revised down from 4.0% to 3.6%. Furthermore, the core PCE deflator was revised down a tick to an annualised 2.3%. The market is more focused on the current quarter, where the Atlanta Fed GDPNow estimate sits at 2.1%, while the goods trade deficit widened to a larger than expected $89.8b in October. The data play to the soft-landing narrative.
Hot of the heels of yesterday’s mixed messages by the Fed’s Waller and Bowman, two more FOMC members, who will be voting on the committee next year, have given contrasting views on the outlook. Atlanta Fed President Bostic said that tighter monetary policy and financial conditions are biting harder into economic activity, and we have yet to see the full effects of restrictive policy, referencing research and input from business leaders, and implying that he didn’t see the need for further tightening. Richmond Fed President Barkin argued for keeping the option open to raise rates again, saying that he’s not ready to commit to a particular policy path with so much uncertainty in the air.
The market is paying more attention to dovish than hawkish Fed commentary and with that in mind, Waller’s comments the previous night and Bostic’s comment last night are resonating. Market pricing now shows the first full easing by the Fed is now locked in for May next year.
In other central bank speak, BoJ board member Adachi urged patience on monetary policy, saying “we’re not at a phase to discuss an exit strategy, given the current economy and inflation”. He said that the Bank will only be able to confirm next year’s wage trend after the new fiscal year starts in April. His view backs Governor Ueda’s recent comments, which have argued for waiting for wage data to give confidence that higher inflation can be sustained and adopting a very slow approach to policy normalisation.
Net currency moves over the past 24 hours have been modest, although the USD has been broadly stronger overnight, recovering some of its recent loss. The AUD has been the weakest of the majors over the past 24 hours, following weaker than expected monthly CPI data which showed a drop to 4.9% y/y. If that is the reason for AUD weakness, then there is little justification for the move, with the data for October heavily weighted to the goods side and revealing little about the inflationary pressure being felt in the domestic/services sectors, which is more important for policy. The AUD found some support just over 0.66 and currently sits at 0.6620.
The NZD shot up from 0.6150 to a high of 0.6208 in the aftermath of the RBNZ’s hawkish-hold, but overnight it has retreated back down to 0.6150. The weaker AUD means that NZD/AUD has sustained its lift to around 0.93. All NZD crosses have weakened overnight, but remain slightly above pre-MPS levels.
The RBNZ produced a set of forecasts raising the chance that further tightening could be required. The Bank seems to have put a lot of weight on the recent strength in migration, and that adding to demand pressures on the economy, with the Bank now seeing asymmetric risks to the inflation outlook. The rate track showed a slightly higher peak in the OCR of 5.7% and a roughly six-month delayed start to any easing cycle, with a full rate cut now not projected until mid-2025. Unbelievably, the OCR remains well above neutral (at 3.6% by end-2026, above the revised higher estimated neutral level of 2.5%) throughout the three-year forecast period, long after inflation returns to 2%.
Not surprisingly, the market views the need for restrictive policy for such a long time with a great deal of scepticism and that was reflected in the market reaction to the Statement. The 2-year swap rate ended the day up only 6bps to 5.23%, or up 10bps from the pre-MPS level, after global forces supported lower rates earlier in the session.
Those global forces kept downward pressure at the long end of the curve, resulting in the 10-year swap rate falling 4bps on the day to 4.76% and thereby resulting in some curve flattening. NZGBs also showed a flattening profile, but to a lesser extent, with no net change in short-end rates and a 3bps fall in the 10-year rate to 4.92%. The OIS curve continues to show little chance of further tightening and a first easing for the cycle in Q3 next year, a full year earlier than the RBNZ has guided.
The calendar in the day ahead is full. Key releases during the local trading session will be the ANZ business outlook survey, expected to show further upside in confidence and activity indicators, given the business-friendly election result, and China PMI data. Key releases tonight include euro area CPI data, expected to show inflation falling further, and US personal income and spending figures alongside the PCE deflators for October. A core increase of 0.2% m/m would see annual inflation fall further, to 3.5% y/y.
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