Global rates have continued to push sharply higher as expectations of more aggressive monetary policy tightening build. The US nonfarm payrolls release was extremely strong, and the market has moved to price around a 40% chance of a 50bps hike by the Fed in March. European rates continue to lift following the hawkish U-turn from the ECB last week. This has flowed through to higher NZ rates and we should see a further significant lift in the NZ curve when trading opens this morning. Equity markets remain volatile although Amazon’s positive earnings result late last week has bolstered sentiment. The NZD has slipped towards 0.6620.
The US nonfarm payrolls release was a stonker, defying predictions from several high-profile forecasters for a negative jobs number. Employment growth was 467k in January (+125k expected) with the US Labor Department noting payrolls might have been even stronger if not for the surge in Omicron cases which saw nearly 2m workers unable to look for work last month. There was a huge 709k of positive revisions to the previous two months, with the December payrolls result revised from 199k to a much stronger 510k. Additionally, wage growth was again much stronger than expected (5.7% y/y vs. 5.2% exp.) with the last three-month pace of wage growth annualising at an astonishing 7.7%. The only blemish in the report was the unemployment rate, which ticked up to 4%, although here too it was a good news story because it was driven by a 0.3% increase in the participation rate. The broader picture remains one of an extremely tight US labour market, fully consistent with the Fed’s desire to get a move on with tightening monetary policy.
Market expectations of Fed rate hikes have taken another leg higher since the payrolls report. There are now more than five hikes priced by the end of 2022 with the market putting a roughly 40% chance of a 50bps rate increase to start off the tightening cycle in March. The US 10-year rate has made a fresh 2-year high of 1.94%.
In Europe, the 5-year German bond rate has broken above 0% for the first time since early-2018 as the market continues to digest the ECB’s hawkish pivot last week. Goldman Sachs was among forecasters scrambling to update their ECB policy forecasts after the meeting, with the bank now calling for all ECB bond buying to end by June followed by 25bps rate hikes at both the September and December meetings. The market is broadly in-line with that view, with almost 50bps of hikes priced by the end of 2022, which would take the ECB’s deposit rate back to 0%. President Lagarde’s pledge overnight that the ECB would move gradually and be “data dependent ” hasn’t done much to deter the market from pricing in rate hikes. Meanwhile, Italian bonds remain under pressure given the prospect of an earlier end to ECB bond buying support, with the Italy-Germany 10-year bond spread widening to an 18-month high of 161bps. In Japan, the 10-year Japan bond rate has made a 6-year high of 0.2%, edging closer to the Yield Curve Control cap of 0.25%.
The global bond sell-off spilled over to the New Zealand market on Friday, with the 10-year government bond yield 8bps higher on the day, to 2.60%. We should expect another significant move higher in NZ rates this morning as the market plays catchup to the post-payrolls moves in global rates.
US equities have performed better over the past few sessions, despite growing concerns around central bank tightening. After Meta’s stunning 26% collapse after its earnings report on Thursday morning, there was relief that Amazon posted a very strong quarter and announced a price hike to its Prime membership, seeing its share price rally 14% on Friday. The S&P500 is up around 0.3% over the past two trading sessions while the NASDAQ, which has bigger weight to Amazon, is up 1.3% since Friday morning.
The USD is modestly stronger since the payrolls report, helped by the increase in Fed rate hike expectations. The BBDXY index is around 0.2% higher than where it stood on Friday morning. The EUR has managed to hold onto most of its post-ECB gains and is still trading around 1.1420, near its recent three-month high. The CAD has recovered from a disappointing Canadian labour market report, with the rates market still highly convicted that the Bank of Canada will kick off its tightening cycle next month (indeed, the market sees a 25% chance of a 50bps rate increase). Meanwhile the NZD has slipped back down to around 0.6620 amidst a generally stronger USD, having briefly traded below 0.66 immediately after payrolls.
The focus this week is the US CPI release on Thursday night which is expected to show a further increase in headline inflation to an eyewatering 7.3% y/y, with core inflation also expected to pick up to 5.9%. Data over the next 24 hours shouldn’t affect markets although investors will be listening to French Central Bank Governor Villeroy’s comments given the prospect of ECB rate hikes later this year.
The focus domestically is the RBNZ’s inflation expectations survey which is released tomorrow. 2-year ahead inflation expectations, which tend to track movements in headline inflation, are likely to increase from their last reading of 2.96%. The RBNZ has previously said that medium-term measures are a better gauge of whether inflation expectations are anchored, so it’s worth keeping an eye on the 5-year and 10-year ahead series, both of which were close to 2% last quarter.
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2 Comments
Central Banks (including the RBNZ) are so dangerously behind the curve that it is not even funny.
Expect progressively more and more aggressive (even panicky), monetary condition tightening this year, especially in the second half of the years. Interest rates worldwide and in NZ will reach levels not seen in many years. Mortgages at 7% start looking like a very possible scenario.
As mortgage rates go up to let’s say 7% the weekly payment on a 1 million mortgage over 30 years is $1530 a week so just to pay mortgage you would need to earn $2300 with week expenses of let say $700 for food power car petrol insurance, this would put up gross earnings to around $3300 per week just to get by. So over year gross earners would need to be $171600 not many people in NZ have this sort of money and 1.2 million in Auckland would buy you a 3 bedroom box on a postage stamp. Once rates go up to 7% you will see a huge crash in prices anyone who has purchased a property in last 3-4 years will see deposit gone and be in negative equity.
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