US and European equities rose to fresh record highs, with the prospect of rate cuts supporting investor confidence in the market, although global rates only show small movements. The ECB left rates on hold and President Lagarde hinted at a June rate cut. The USD is broadly weaker again, with the NZD lifting to 0.6170, although JPY has outperformed as the BoJ edges closer to a rate hike.
Equity market performance for the day seems correlated with expectations of monetary policy, with the prospect of rate cuts by the ECB and Fed driving the S&P500 (+0.9%) and Euro Stoxx 600 (+1.0%) to fresh record highs, and the prospect of a rate hike by the BoJ seeing the Nikkei 225 index falling, down 1.2%.
Fed Chair Powell faced another session in front of lawmakers and, while the key messages were the same, the headlines appeared dovish. He said the Fed was “not far” from having confidence to cut rates, following a comment that the cuts “can and will begin” this year with continued disinflation, adding that the Fed understands the risks of waiting too long to cut rates. US Treasuries only show small moves for the day, with a steepening bias. The 2-year rate is down 3bps and the 10-year rate up 1bp at 4.12%.
There were no real surprises from the ECB, which kept rates on hold and lowered its inflation and growth projections for this year and with minor revisions further out. Headline and core Inflation are expected to average close to 2% through 2025 and 2026. President Lagarde said that progress toward the inflation target is good and that policy makers are more confident but not sufficiently confident. On policy, she said the ECB was unlikely to be in a position to cut rates in April – the Bank will only have a little more data then – while in June they will know a lot more. This was consistent with her previous message that the ECB would likely be cutting rates in the summer.
In terms of the market’s reaction, initial falls in rates and EUR were reversed. German 2 and 10-year rates are down 2bps on the day and EUR is modestly stronger at 1.0935, but much of this reflecting broad-based weakness in the USD. The market almost fully prices a full rate cut by June and nearly four rate cuts by year-end.
Yesterday, Japanese wage growth positively surprised at 2.0% y/y in January, the fastest rate since June. The BoJ is looking for a sustained lift in wage inflation before lifting rates to give it confidence that higher CPI inflation will be sustained. Bloomberg reported that “BoJ officials are getting more confident over the strength of wage growth” and “a consensus has yet to emerge among officials on whether the central bank should move…at the policy meeting on March 19 or wait until April”, regarding the scrapping of its negative interest rate.
In addition, BoJ board member Nakagama said “there are signs of a clear shift in businesses’ behaviour for setting wages” and he noted the steady progress toward meeting the stable 2% inflation target. Rengo, Japan’s largest labour union, announced that the average demand for wages was +5.85%, up from the initial demand of 4.49% a year ago, while a smaller union showed full-time workers with average wage gains of 6.7%, well up from the 5.3% a year ago.
All this news raised speculation that the BoJ’s meeting later this month is definitely live for a possible rate hike. The 2-year JGB rate rose to a fresh 13-year high just below 0.2% and, with near record short positions in the yen and the chance of an imminent rate hike against the global trend, the yen strengthened. USD/JPY fell to as low as 147.60 and currently sits just above 148.
Against a backdrop of stronger risk appetite, the USD is broadly weaker for a second day. NZD has shown a steady rise to 0.6170 and the AUD to 0.6620. NZD/JPY traded below 91 overnight but has recovered to 91.4 and NZD/AUD has drifted down to 0.9325. The NZD has made modest gains of 0.2-0.4% against EUR, GBP and CAD.
US economic data showed initial jobless claims broadly in line with market expectations, unchanged at 217k, while continuing claims continued to push higher, a sign that it is taking longer for people who lost jobs to find a new one. US companies announced about 85k of job cuts in February, according to Challenger, with this indicator suggesting that initial jobless claims data will soon show a decisive lift, a reflection of a weakening labour market. In Germany, big ticket items are responsible for the 11.3% slump in factory orders in January, following the revised higher 12% lift in December, while the underlying trend remains soft.
Chinese exports and imports data were stronger than expected, with exports for the Jan-Feb period combined up 7.1% y/y in USD terms, an encouraging sign even if there is doubt whether it can be sustained, while imports were up 3.5%.
In the domestic rates market there were relatively small movements, with NZGBs down a touch from the 5-year maturity onwards. NZDM’s weekly bond tender went well, with less duration for the market to absorb than usual, seeing good bid-cover ratios and the tenders clearing through prevailing mid rates. Swaps rates fell 2-3bps across the curve.
NZ quarterly indicators released that feed into Q4 GDP resulted in BNZ Economics nudging up its estimate to +0.1%. Against strong population growth of 0.6% for the quarter, this would represent another significant contraction in GDP per capita, with the economy experiencing conditions similar to the depths of the GFC on this basis – not news to most.
In the day ahead, the focus will be on the US employment report, with the consensus expecting a still-solid 200k lift in non-farm payrolls, leaving the unemployment rate unchanged at 3.7%, while average hourly earnings increases by “only” 0.2% m/m, seeing the annual increase nudge down to 4.3%. China inflation data will be released on Saturday.
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