US 10-year rate breaks the bottom of the range - now 1.49%. Little movement in equities or currencies ahead of US CPI, ECB tonight. NZD underperforms again - back below 0.72

Global rates have fallen overnight, despite little fresh news.  The US 10-year rate is trading below 1.50% and is set for its lowest close since early March.  Movements in equities and currencies have been limited ahead of the US CPI release and ECB policy meeting tonight.  The NZD is back below 0.72.

There hasn’t been much news overnight, with no economic data released in the major economies and the Fed currently in ‘blackout’ ahead of its meeting next week.

The standout mover amongst asset markets overnight has been the bond market.  US Treasury yields have slipped further, with the 10-year rate falling from 1.53% to as low as 1.47%, before recovering marginally to 1.49%.  Except for a brief period after the US nonfarm payrolls report in early May, the US 10-year rate is trading at its lowest point since early March.  The falls in US rates have cascaded to other markets, with the German 10-year rate falling 2bps to -0.24%, its lowest level in a month.

In the absence of any clear macro catalyst, the likely culprit for the recent fall in US rates is market positioning.  JP Morgan’s client survey showed US Treasury positioning was near its most ‘short’ since early 2018 (when the Fed was hiking interest rates) and the recent price action is consistent with some investors closing out positions.  Strong demand was seen in the 10-year US bond auction overnight, with the bid-to-cover ratio above average.  Inflation concerns are also showing signs of subsiding, with the US 10-year breakeven inflation rate falling back to 2.34%, its lowest level in over a month.  The other key factor helping to contain bond yields is the Fed’s dovish rhetoric, with the central bank continuing to play down current inflation pressures as transitory.

On that note, the US CPI release tonight is expected to come in at a whopping 4.7% y/y with core inflation expected to lift to 3.5%, which would be its highest level since 1993.  But the debate about whether this is “transitory” inflation, or something more permanent won’t be settled tonight.  The debate is likely to rage for many months yet.

Equity and currency moves have been muted compared to those in bonds.  The S&P500 is flat on the day and is trading fractionally below its all-time high while the NASDAQ has gained 0.2%.  The USD reversed an earlier fall and is back to unchanged on the day, in index terms.  Both the DXY and BBDXY indexes remain near multi-year lows.  Movements in the G10 currencies are all within +/- 0.3% from this time yesterday.

At its meeting overnight, the Bank of Canada kept all its policy settings unchanged, as universally expected.  The BoC said it would maintain its bond buying at $3b/week, although the market expects a further tapering to be announced at next month’s meeting.  It reiterated the same guidance around the cash rate, saying it would keep rates at 0.25% until economic slack was fully absorbed, which on the Bank’s forecasts takes place in the second half of 2022.  The market prices a slightly better than even chance that the BoC will raise rates in 12 months’ time.  The CAD fell back after the statement was released, to now be unchanged on the day, although the move coincided with the broader turnaround in the USD.

The NZD has underperformed again overnight, for no obvious reason, and is trading back at around 0.7180 (-0.3% on the day).  This despite the Bloomberg Commodity index and equity markets edging higher overnight.  The NZD/AUD cross has slipped to around 0.9280, its lowest level in three weeks.

The GBP has been the other underperformer in the currency market overnight, falling 0.3% to 1.4110.  Renewed tensions between the UK and EU over Northern Ireland, with the EU threatening sanctions, haven’t helped sentiment.  The market looked through comments from outgoing Bank of England Chief Economist Haldane, who warned “this is the most ¬dangerous moment for monetary policy since…1992” and said waiting too long to raise interest rates risked an overheated economy and a more aggressive monetary policy response down the line.

In New Zealand yesterday, there was more evidence of the risk of the NZ economy overheating from the preliminary version of the ANZ business survey for June.  The key Own Activity indicator edged up to 29.1, its highest level since before the 2017 election and consistent with GDP growth in the region of 3%.  Employment intentions remained at levels consistent with, at face value, job growth of around 5%.  Labour market shortages mean employment growth will almost certainly fall short of this, but it reinforces our view that the labour market will be much stronger than the RBNZ’s forecasts.  Finally, pricing intentions moved up to a fresh record (post-1992) high, with a staggering 62.8% of businesses intending to raise prices.  Separately, SEEK job ads hit a record high in May, with the series now surpassing pre-Covid levels by some 20%.

We revised up our NZ Q1 GDP forecast after the release of more partial indicators yesterday. Precision is challenging in the current environment, but, given the partials, it seems quite likely that the outcome will print positive. Whether it matches our 0.8% estimate isn’t the point. Any positive would be well above the RBNZ’s -0.6% assumption. Something along these lines would represent another upside surprise for the RBNZ, in the context of positive forward-looking indicators.  We still forecast the RBNZ to start raising the OCR next May.

NZDM syndicated $2.25b of a new May 2032 government bond yesterday at a spread of +13 bps to the May 2031 bond, the tight end of price guidance.  NZ government bond yields and swap rates were lower yesterday, reflecting global forces, by between 5-6 bps at the 10-year point of the curve.  NZ rates are likely to open lower again this morning, reflecting the overnight moves in US Treasuries.

Besides the US CPI release tonight, the other focus is the ECB’s monetary policy meeting.  The main interest with the ECB meeting is whether President Lagarde signals a slowdown in its bond buying pace in Q3, having previously decided to ‘frontload’ purchases in Q2.