UST 10yr up over 3% again despite weaker US PPI. Eyes on US CPI data. Eyes also on the new RBNZ Governor and the MPS

By Nick Smyth

Oil prices have pushed higher again overnight in the wake of Trump’s decision to reinstate sanctions on Iran, helping to push the 10 year Treasury yield back above 3%.

US equities are near one month highs, with energy stocks leading the charge.

Commodity currencies have outperformed in FX markets.  The NZD is back close to 0.70 ahead of the much anticipated RBNZ meeting this morning. 

Oil prices remain a key focus for the market post Trump’s announcement that he was reinstating sanctions on Iran.  Oil prices have moved higher the past 24 hours, with WTI moving above $71 per barrel (up over 3% on the day) and at new post-2014 highs.  The weekly US DoE report showed a further draw in US oil inventories, reinforcing the notion that the oil market was tightening and hence vulnerable to a reduction of Iran crude supply. 

The move higher in oil prices came despite suggestions that Saudi Arabia – a strong supporter of the US’s hardline stance on Iran – could make up for the short-fall in output.  US Treasury Secretary Mnuchin said overnight that “we have had various conversations with various parties about different parties that would be willing to increase oil supply to offset this…my expectation is not that oil prices go higher.”  Shortly after Trump’s decision Saudi Arabia released a statement saying that it would work to “mitigate the effects of any supply shortages”, raising the prospect that it could raise its own supply.  President Trump only last month blamed OPEC for “artificially Very High” oil prices. The EU and UK have also signalled their intention to find a solution to keep Iran on board with the deal and business flowing (there is a 90 to 180 day grace period before sanctions kick in), but it is uncertain whether risk-averse companies would be willing to risk a confrontation with the US. 

The move higher in oil has helped boost Treasury yields, with the 10 year rate back above 3% and close to the early 2014 highs of 3.05%.  Market expectations of inflation (so called “breakeven inflation”) increased a few bps to its highest levels since 2014.  There was no reaction to the slightly weaker than expected US core PPI release given its marginal correlation with core CPI.  With inflation front and centre of the market’s attention, the release of US core CPI tonight has the potential to be cause a decent reaction if it is materially different from expectations (particularly so, in the current environment, if it shows higher core inflation we suspect). 

Equity markets have moved higher, with energy stocks leading the way (the S&P500 is up around 1% and near a one month high, with the energy sector over 2% higher).  Equities have been supported by declining volatility, with the VIX moving below 14 and back to the levels of late January (before volatility erupted after an unexpected increase in US wage growth).  Meanwhile, the head of investor relations for Caterpillar sought to play down comments made by the firm’s CFO at the earnings call last month (he mentioned Q1 would be “the high watermark for the year”) saying that this didn’t have anything to do with the outlook for sales, more that costs were expected to rise during the year and Q1 was “exceptionally” strong. 

In FX markets, commodity currencies have been the outperformers, particularly so those linked to oil (Canada, Norway).  The NZD and AUD have made more modest gains against the USD the past 24 hours, with the NZD moving up to a bit below 0.70.  There was no reaction to weak NZ electronic card transactions data, which we think may have been distorted by the timing of holidays this year. 

The RBNZ’s Monetary Policy Statement is released this morning, with much focus on what new Governor Adrian Orr has to say in both the press conference and at the Parliament’s Finance and Expenditure committee.  The market fully prices the first RBNZ hike for June next year, with the second hike priced for March 2020. 

In other currencies, the JPY is the weakest performer against a backdrop of higher US Treasury yields and improving risk appetite.  Meanwhile the GBP has bounced off support at 1.35 again ahead of the Bank of England’s monetary policy decision tonight (only 10% chance of a hike priced, but much interest in what Governor Carney has to say about the policy outlook). 


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