US equity markets recover. US 10-year rate moves back to 1.66%. Fed officials continue to claim current inflation pressures will be temporary. NZ 10-year swap rate breaks above 2% for the first time since March

US Treasury yields retraced some of their sharp post-CPI moves overnight, with the US 10-year rate falling back to 1.66%.  Equity markets have also partially recovered after their heavy losses yesterday.  Currency movements have been relatively muted, although the NZD has outperformed, albeit modestly.  Yesterday, global forces dragged the NZ 10-year swap rate back above 2% for the first time since March.

The market continues to digest the much stronger than expected US CPI release from Wednesday night.  Price action over the past 24 hours is probably best described as a ‘relief rally’ in equity and bond markets, after both experienced big falls in the wake of the higher US inflation reading.

US equity markets opened strongly, with the S&P500 and NASDAQ both increasing around 1.6% in the first hour of trading.  There has been intraday volatility but the S&P500 is still up a healthy 1.4% and the NASDAQ is 0.9% higher.

The US 10-year rate has eased back a few basis points from yesterday’s closing levels amidst further comments from Fed officials that the inflation spike will likely prove temporary and softness in commodity prices.  The US 10-year rate is trading this morning around 1.66%, down 3bps on the day, while the German 10-year rate hit a two-year high of -0.10% before moving back down to -0.12%.  US 10-year breakeven inflation has fallen 2bps to 2.54%, back where it was before the CPI release.

Fed Governor Waller echoed comments by vice chair Clarida the previous night, saying in a speech that that the factors putting upward pressure on inflation were likely to prove temporary and the Fed “will not overreact to temporary overshoots of inflation.”  Waller described the economy as “going gangbusters” but said the Fed would need to see several more months of data before thinking about tapering, adding this would help it determine whether the shocking April payrolls report was an outlier.

Economic data has had little market impact.  US jobless claims continue to trend lower, consistent with an improved labour market (even if this wasn’t visible in the April payrolls report).  US PPI was also higher than expected, consistent with increasing cost pressures in the economy, but the market looked through the data given the more important CPI number had been reported the previous day.

Consistent with recent indications of job shortages and wage pressure in the US, McDonalds announced it will increase starting wages by around 10%, on average, in a bid to attract and retain staff.  The wage rises will be rolled out in the coming months and affect more than 36,000 employees.  Meanwhile, Amazon said it was planned to hire an additional 75,000 workers, offering a higher-than-usual $17 per hour wage and a $1,000 sign-on bonus in some cases.  Amazon raised wages in April for more than 500,000 employees.  April wage growth in the payrolls report was much stronger than economists’ expectations.

After their recent surge higher, commodity prices have come under pressure over the past 24 hours.  Iron ore futures in Singapore slumped almost 9%, to $207, on signs that China would take steps to cool prices.  Copper fell around 1% although it remained above its previous all-time high, set in 2011.  Oil prices were off by around 2%.

Currencies haven’t moved much over the past 24 hours.  The Bloomberg USD index (BBDXY) has tracked sideways, consolidating after yesterday’s 0.7% appreciation.  The EUR and AUD are both broadly unchanged compared to this time yesterday.  The CAD and NOK have both underperformed, down 0.2-0.3%, amidst the falls in oil prices.  The CAD also took a hit after Bank of Canada Governor Macklem warned that further appreciation in the currency could impact the Bank’s policy rate outlook.  Macklem added that the BoC would keep its accommodative policy until there was a “complete” recovery in the economy.  At its recent monetary policy meeting, the BoC said it expected the conditions for rate rises would likely be met in the second half of 2022, one of the first central banks to discuss the potential for tightening next year.

The NZD has recovered some of the previous night’s underperformance.  It trades this morning near the highs of the day, around 0.7190, up around 0.4% over past 24 hours, the best performance amongst the G10 currencies.  The NZD/AUD cross is back at the 0.93 mark while there have been gains of 0.2%-0.5% on the other key crosses.

Turning to domestic developments, the NZ interest rate curve followed global curves higher and steeper yesterday.  The 2-year swap rate continued to edge a little higher, closing at 0.555%, its highest level since early March.  The 10-year swap rate increased 5bps, breaking back above 2% for the first time in two months.

While market-based inflation expectations (so-called ‘breakeven inflation’) have been getting a lot of market attention in the US, its worth highlighting that NZ breakeven inflation is also back near multi-year highs.  The 10-year NZ breakeven inflation rate closed yesterday at 1.96%, a whisker away from 2%, a level which hasn’t been reached since 2014.  The increase in market-based inflation expectations chimes with the recent rise in the surveyed inflation expectations, to just above 2% on a two-year ahead basis.

Yesterday’s REINZ housing data suggested the property market was still firm in April, a month after the government announced new policy measures to dampen investor demand.  Sales were the strongest for an April in five years while inventory remained very low.  Monthly house price growth moderated somewhat, but only to 2.0% in April, from 2.7% in March, seasonally adjusted.  We still think it will take a few months to properly judge how the housing market is responding to the government’s recent policies.

The NZ manufacturing PMI, which hit a record high of 63.6 in March, is released this morning.  Offshore, the focus will be on US retail sales tonight.  The market consensus is for a more moderate increase in spending growth in April (+1% on a headline basis and +0.3% on a core basis) after the bumper March result.  Given recent market jitters around inflation, there may also be focus on the 5-10 year ahead inflation expectations series in the University of Michigan survey, which was near a five-year high last month.