Inflation expectations continue to rise, US 10y BEIs up to a fresh 8-year high; industrial commodity prices stretch higher. Further rotation out of tech stocks into "value". GBP gains over 1% post Scottish elections

Another notable rotation out of tech stocks has dragged down the S&P500 against the backdrop of inflation fears, as some key industrial commodity prices stretch higher and the US 10-year break-even rate prints a fresh eight-year high. Currency markets show only modest movements apart from a strong gain in GBP, following the Scottish elections over the weekend. NZD temporarily broke above 0.73.

There hasn’t been much newsflow to start the week but investors are focused on the inexorable rise in industrial commodity prices. During the Asian trading session both iron ore and copper prices surged further, both printing record highs - the former rising over 10% to break above USD225 and since receding to USD215. Bloomberg’s commodity price index had risen by 17 of the past 19 days, although a fall in some soft commodities (such as wheat, coffee, corn, and cotton) has dragged the index lower overnight.

Stronger industrial commodity prices reflect strong global demand as major central banks have “pedal to the metal” and supply not being able to respond quick enough, generating a strong inflationary impulse. The implied break-even inflation rate on 10-year inflation-indexed Treasuries rose to a fresh eight-year high of 2.58% overnight and is currently up 4bps on the day at 2.54%. The nominal 10-year rate has traded a 1.56-1.60% range and currently sits near the top of that range, up 2bps for the day. Positioning is still likely a factor in keeping the key 10-year rate in check for now.

Fears of inflation, and ultimately higher bond yields, continue to drive a notable rotation in the equity market. Tech stocks have been hit hard, with the Nasdaq index down well over 2% and this sector dragging the S&P500 into negative territory, currently down 0.8%. Of note, most sectors are actually higher, with gains for Energy, Utilities, Consumer Staples, Industrials and Financials amongst others.

Currency markets have been fairly dull by comparison with most majors showing only small movement. GBP has been an exception, up over 1% for the day to 1.4150 following the passing of the Scottish elections risk event. The Scottish National Party fell one seat short of an outright majority, reducing the chance of a near-term vote on independence, but aligning with the Green Party, which increased its share of the vote, would give enough votes to form a pro-independence majority. However, there are many hurdles to cross and a long time before a second referendum becomes a real threat. Current polling shows Scotland only roughly 50:50 on independence and PM Johnson would need to agree to a referendum, something that is likely to be resisted. We remain positive on the outlook for the GBP and see further strong gains ahead.

The NZD has made a fresh two-month high, clearing the 0.73 mark, with an overnight high of 0.7305, since falling back to 0.7270. We put resistance at 0.7315 and a clearing of that would open up another look at the year-to-date high of 0.7465. Higher risk appetite and commodity prices continue to push our short-term fair value model estimate higher, currently 0.7360. GBP strength has seen NZD/GBP fall 1% to 0.5150.

The AUD also made a fresh two-month high around 0.7890 and has since fallen back to 0.7840. The recent rally in commodity prices puts fair value north of 0.80, a level we’d expect to be breached this half of the year. NZD/AUD continues to track sideways and sits at 0.9275. NAB’s business outlook survey wasn’t a market mover but showed a number of indicators stretching to fresh record highs, including the key business conditions variable, capacity utilisation and capex. There was also evidence of higher inflationary pressure.

The backdrop of higher global rates saw domestic rates generally higher across the curve and a steepening bias. The 2-year swap rate rose 1bp to 0.53% while the 10-year rate rose 5bps to 1.93%. The 10-year NZGB rate rose 4bps to 1.77%. The next two key dates on the NZ economic calendar are the Budget on 20 May and RBNZ MPS on 26 May.

In the day ahead the economic calendar remains light. After NZ electronic card transactions, Chinese inflation data are due this afternoon, with PPIs figures likely capturing the global inflationary impulse. Tonight sees the release of Germany’s ZEW survey and the NFIB small business survey in the US.