The US CPI came in flat and up 1.4% yoy while the core measure was up 0.3% m/m and 2.2% yoy. These were both 0.1% stronger than expected. With higher inflation a necessary condition for the Fed to raise rates further this year, short US rates rose, with the 2-year Treasury rate up a solid 5 bps to 0.74%.
The 10-year rate spiked up to 1.78% on the CPI news, but the risk-off mood won the battle and it ended flat at 1.74%.
The data should give the market plenty to think about over coming weeks.
The probability of the Fed tightening again this year moved up to 45%, but more evidence of increasing inflationary pressure could easily see another couple of rate hikes firmly back on the table. We see the 10-year rate moving back above the 2% mark as the next tightening comes more into focus.
NZ rates ended Friday lower across the curve, reflecting the previous day’s US trading. The NZ 2-year swap rate fell below the 2.5% mark for the first time since June 2012, closing at 2.49%, as expectations of another RBNZ rate cut improve. Recall that earlier in the week, NZ inflation expectations fell to their lowest level ever relative to the mid-point of the inflation target. Governor Wheeler’s recent speech noted that he wouldn’t want to see a significant decline in inflation expectations. In simple terms, a 25 bp rate cut is now required just to keep the real OCR rate constant prior to that data release.
NZ’s yield curve continued to flatten, with the 10-year swap rate down 7 bps to 3.17%. It is a very light week ahead on the NZ economic calendar, so offshore moves are going to be the dominant force on NZ rates.
Coming Up
The data calendar is fairly light at the beginning of this week. With oil markets still in focus, the International Energy Agency’s five year outlook released today will be interesting.
The G20 Finance Ministers and central bank governors meeting beginning in Shanghai on Friday will watched closely. It would be nice to see some sort of Statement indicating coordinated monetary policy to avoid currency wars, but that would be too much to wish for.
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1 Comments
'The G20 Finance Ministers and central bank governors meeting beginning in Shanghai on Friday will watched closely. It would be nice to see some sort of Statement indicating coordinated monetary policy to avoid currency wars, but that would be too much to wish for.'
Central planners have pushed too far and for too long in the completely wrong direction, and have now lost control. Nobody in their right mind takes any of them seriously anymore. Unfortunately, they still have the political power to make matters worse and cause a lot more damage, and will undoubtedly do so.
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