US bond and equity markets overnight have been supported by another soft CPI reading, reducing some fear in the market about inflation risks. The USD has traded weaker post that CPI result. The NZD has recovered some lost ground during local trading hours and sits slightly higher from this time yesterday.
US CPI data overnight was a market mover, coming in on the soft side of expectations. Core CPI inflation recorded its third straight monthly sub-par reading in February, rising just 0.1% m/m. This followed a couple of flat results and drove the annual increase down to 1.3% y/y. Investors have been worried that inflation pressures will surge due to too-much policy stimulus at a time when the economy is opening back up for business. Base effects mean that annual inflation will naturally rise from March onwards, but the month-to-month increases will need to pick up as well to validate the market’s bringing forward of rate hike expectations and the significant pick-up in bond yields this year.
After slightly softer S&P futures during Asian and early European trading, the cash market opened on a positive note and the S&P500 is now up 0.8%, following up on the 1.4% gain yesterday, with cyclicals and financial sectors outperforming. The US 10-year rate was trading up at 1.56% prior to the CPI report, and has now fallen back down to 1.51%, down 2bps from the NZ close. The rate fell to 1.51% leading into the much-anticipated 10-year bond auction and the auction appeared to go satisfactorily, of some relief to the market, with the allotted yield 1bp higher at 1.52%.
The Bank of Canada left it policy settings and guidance unchanged, reiterating that its cash rate wouldn’t rise until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved, something not expected to happen until into 2023. QE will continue at a pace of at least $4b per week. Some in the market expected a slightly less dovish tone with a hint about future reductions in asset purchases, after the better dataflow of late, so there was a mild rally across the curve, but the impact on CAD was fairly minimal.
China aggregate financing data were stronger than expected in February, driven by corporate loans, suggesting easy credit conditions that are likely supporting the economic recovery.
The soft CPI reading has put the USD on the backfoot, broadly weaker compared to the NZ close. The NZD and AUD have performed the best overnight, but most of the 0.5% gain simply reverses some weakness seen during Asian trading hours. The NZD touched 0.7200 overnight and has settled back down to 0.7180, slightly higher from this time yesterday. The AUD traded up through 0.7740 and has faded a little since. NZD/AUD continues to flatline around 0.93. Other currency majors we follow have only shown small overnight gains versus the USD.
Yesterday, the domestic rates market saw rates fall across the curve in a bull flattening, dragged down by lower Australian rates. RBA Governor Lowe repeated his dovish missive saying that the cash rate is “very likely” to remain at 0.1% until at least 2024 (not a typo). He doesn’t share the market’s view of a possible rate increase as soon as late next year. While his comments had little impact on the AUD, Australian rates rallied and that has continued overnight. The implied yield on the 10-year bond future is about 4bps lower from the NZ close.
NZ electronic card transactions fell by a chunky 3.2% in February, the third successive monthly decline. It was another reminder of the near-term headwinds for the NZ economy as the impact of a lack of global tourists hits and as the economy goes in and out of short-term lockdowns.
At the ECB meeting tonight, no change in policy settings is expected, but interest will lie in ECB President Lagarde’s response to questions about the bond buying programme. The run-rate has slowed of late even in the face of upward pressure on bond yields, so Lagarde will have some explaining to do and the euro could be sensitive to how she answers the question.
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