The market has maintained a cautious tone, ahead of the FOMC update tomorrow morning, with very strong US PPI inflation data adding to jitters. US equities are down over 1%, while US rates have nudged higher. Currency movements have been modest, with the NZD continuing to languish around 0.6750.
In just over 24 hours, the Fed will publish updated forecasts, including interest rate projections. At the last two of these updates, in June and September, projected rate hikes were brought forward and the USD has exhibited upward momentum since, while the more hawkish pivot hasn’t prevented US equities from trending higher, or the US 10-year rate from tracking around the historically low 1½% mark. Since those last two updates, inflation has surged into another realm and there is a rising chance that we’re witnessing one of the worst policy blunders in modern history. This sets the scene ahead of the meeting and as investors look towards 2022.
After closing at a record high on Friday, there are some evident nerves, with the S&P 500 currently down over 1%, adding to the 0.9% loss yesterday. The Nasdaq index is down about 2%, following yesterday’s 1.4% fall. The US rates market shows less angst, with 2 and 10-year rates up 2bps for the day, the latter at 1.44% after touching 1.47% overnight.
US PPI inflation surged further, to a higher than expected 9.6% y/y for final demand and 7.7% for the ex food and energy series. These series have only been in existence since 2010, but the finished goods PPI, which has a longer history, rose by 13.3% y/y, the strongest since 1980. The PPI for processed goods for intermediate demand was up 26.5% y/y (not a typo), indicative of the strength of inflation in the “pipeline”. Back in 1980, the Fed Funds and 10-year rate were above 10%, not at the close to zero and below 1.5% levels currently. The data add to the inflation angst by the market and likely cements in the more hawkish pivot widely expected by the Fed.
Other data released overnight were in line with expectations. Of interest, UK labour market data showed further strength, with workers that had been furloughed having seemingly no trouble finding work, and labour demand out-stripping supply. If not for the surge in Omicron case numbers, a BoE rate hike would be taken as given at the end of the week, but the Bank is widely expected to keep rates steady.
More analysis of Omicron from a South African study of over 200,000 COVID19 cases showed reduced vaccine effectiveness of a two-dose Pfizer regimen from 80% for Delta to 33% for Omicron, but its effect on hospitalisation was less marked, from 93% to 70%. In contrast to adults, children under the age of 18 are 20% were more likely to end up in hospital.
Pfizer reported that its anti-viral pill Paxloid cut the risk of hospitalisation or death by up to 89% in high-risk patients and 70% in standard risk patients, according to the final trial results that confirm earlier data. While the trial was conducted when Delta was the prominent variant, early lab studies showed it continued to work against Omicron.
UK and European gas prices rose another 10%, adding to the 10% gains the previous day, with low inventories, geopolitical risk at the Russia-Ukraine border, cold temperatures and a lack of wind power all adding to the fear of power shortages. Oil prices are down 2%, with the IEA saying that the global oil market has returned to surplus, while traders see weaker demand from Omicron as some countries impose restrictions to stop its spread.
Currency movements have been modest for the majors we closely monitor. In overnight moves, CAD is on the soft side (down 0.2%) and GDP is on the stronger side (+0.3%), while other movements are within +/- 0.1% against the USD. The NZD has tracked sideways around the 0.6750 mark, after posting a fresh year-to-date low of 0.6736 yesterday afternoon, 1pip below last week’s low. After dipping below 0.71 yesterday, the AUD is trying to stay just above that mark. NZD/AUD is close to 0.95.
Domestic rates were pushed down by global forces yesterday. NZGBs were marked 4-6bps lower across much of the curve, while there was a slight flattening bias for the swaps curve, with better receivers at the long end. The 10-year swap rate fell 4bps against a 2bps fall in the 2-year rate.
The economic calendar in the day ahead is heavy. NZ’s current account deficit is expected to show a further blow-out, to 4½% of GDP, while the government fiscal update is expected to show stronger figures than the May Budget, despite the lockdown restrictions. China monthly activity data for November, UK CPI, US retail sales and Canadian CPI data are the key global releases. Our next daily report will be published before the FOMC update at 8am NZ time.