Global rates continue to push higher, US 10-year rate just shy of 2%, NZ 10-year rate hits fresh three-year high. Some apparent de-escalation of Ukraine situation; oil prices weaker

There hasn’t been a great deal of news to digest, but everyone is watching global rates push higher and wondering how high they can go this cycle. The US 10-year rate is closing in on the 2% mark. This hasn’t affected US equities overnight, with the S&P500 currently up 0.8%. Currency moves have been modest and the NZD has tracked sideways around 0.6640.

The global bond market sell-off in the face of a massive inflationary pulse and hawkish pivots from a number of central banks continues. US Treasury yields have printed fresh highs for the cycle, with the 2-year rate trading as high as 1.34% and the 10-year rate trading just under 1.97%, currently up 4bps for the day at 1.96%. European 10-year rates are up 4-6bps, and the UK 10-year rate is up 8bps. Japan’s 10-year rate traded as high as 0.21%, getting close to the BoJ’s tolerance limit and traders are contemplating whether the BoJ will soon step in to defend the market.

The next key bond-sensitive event is the US CPI data release Thursday night NZ time, where the monthly inflation figures for January are expected to show a little easing, even if the annual figures reach new heights of 7.3% y/y for the headline rate and 5.9% for the core.

The mood music on the Russia/Ukraine situation sounds a bit more positive, after French President Macron’s meeting with President Putin. Macron said he received assurances from Putin that Russia wouldn’t escalate tensions further around Ukraine and he would withdraw thousands of Russian troops from Belarus after completion of planned exercises.  A Kremlin spokesman cast some doubts on Macron’s version and Macron’s office later clarified that the assurances were “conditional” and could change. Still, we’ll take that as a win.

Oil prices fell around 3% for the day on the talk of descalation of the Ukraine situation and the resumption of Iran nuclear talks, which could potentially lead to increased supply on any deal. After hitting the USD94 per barrel mark late last week, Brent crude briefly went as low as sub-90 this morning.

Iron ore prices rose through the $150 per ton mark after China set 2030 as the new deadline for peak-emissions for the steel industry, five years later from the prior 2025 target. This is part of President Xi’s strategy to reduce the impact on the economy from China’s climate change policies.  Prices had troughed in the low 90s in November and have been on a steady rise since.

In economic news, the US trade deficit for December was slightly lower than expected but for 2021 was still the largest on record, up 27% on the previous year at $859b, another sign of an over-heated economy as stimulus funds sucked in greater imports. The NFIB small business optimism index fell to an 11-month low, close to expectations. Inflation indicators rose to record highs for the survey which dates back to 1986, with 61% of firms reporting increasing average selling prices and 50% of firms saying they boosted wages, given the difficulty in finding labour.

Currencies show modest movements. The NZD has largely tracked sideways around the 0.6640 mark, continuing to show signs of consolidation, after reaching an oversold level at the end of January. The same can be said for the AUD, which is tracking around 0.7130. Everyone seems to be much more hawkish than the RBA’s policy guidance, with two of the major trading banks suggesting a June rate hike was “live”, after the May election. Former RBA Board member John Edwards said he expects the RBA to raise rates four times in succession later this year. The market has been well ahead of the analysts in anticipating some RBA capitulation on policy, hence the AUD has been largely immune to recent RBA-speak over recent weeks.

Against the backdrop of higher global rates, JPY has underperformed, with USD/JPY down to 115.60 and NZD/JPY up about 0.5% for the day to 76.75.

Following the Waitangi Day holiday, the domestic rates market played catch-up to the moves elsewhere since the stonker US employment report on Friday night. Curves were higher and steeper, with the 2-year swap rate up 6bps to 2.50% and 10-year swap up 11bps to 2.91%, with the 10-year NZGB rate showing a similar increase, up to 2.71%.  On generic yields, this was the highest close for the NZ’s 10-year bond rate since November 2018.

The economic calendar in the day ahead is light, even more so after the RBNZ delayed the release by a couple of days for its survey of expectations. Overnight, Bank of Canada Governor Macklem and the Fed’s Mester give speeches.