Newsflow has been very light and ahead of tonight’s key US CPI data, risk appetite is higher, with US equities showing solid broadly based gains and the NZD enjoying a tailwind from this improved sentiment, heading towards 0.67. After reaching fresh cycle highs yesterday, global 10-year rates have eased back a bit.
The market doesn’t seem too worried about tonight’s US CPI print which is expected to show annual inflation at a fresh multi-decade high of 7.3% y/y. The S&P500 is currently up 1.2%, with all sectors contributing, while the Euro Stoxx 600 index closed 1.7% higher.
There has been a pause in the global bond market sell-off with yields reversing course across Europe and the US. Key European 10-year bond rates are mostly down 5-6bps, with Italy slightly more at 10bps. In the US there has been some curve flattening, with the 2-year rate little changed, while the 10-year rate is down 4bps to 1.92%, and has traded in a tight overnight range of 1.915%-1.945%.
In currency markets, the NZD has been the best performer, with a nice rally from early European trading hours, correlated with the lift in S&P futures from that time, suggesting the recovery is linked to risk appetite. Since the local close the NZD is up 0.6%, or 1% higher from this time yesterday to just under the 0.67 mark. The AUD has also performed well, lifting to 0.7190. NZD/AUD fell below 0.93 during local trading hours, but has recovered to sit just above that mark.
The other majors show little net overnight movement against the USD. NZD/EUR is back around 0.5850, having recovered most of the loss seen since last week’s hawkish pivot by the ECB. NZD/JPY has regained the 77 handle, while NZD/GBP is up to 0.4940. The BoE’s chief economist attempted to douse hawkish market expectations, arguing for a more measured and data-dependent approach to adjusting policy, learning how the economy reacts to each step rather than pre-committing to a path. He also said that the 1% policy rate is not necessarily a trigger to begin active bond sales, but “a point of consideration”.
Atlanta Fed President Bostic told CNBC that he was looking for three rate hikes this year, “leaning a little towards four”, and projected the PCE deflator to fall to 3% by the end of this year. He thought inflation was “at the cusp” of easing in terms of month-on-month increases. On the size of increases, he didn’t rule out the chance of a 50bps increment at any meeting, saying every option was on the table and the policy path was data dependent. He wanted to see the Fed’s balance sheet reduced “pretty significantly” and as soon as possible.
Prepared remarks from Cleveland Fed President Mester’s speech looked consistent with Chair Powell’s narrative, arguing that the path of rates would be data dependent and this cycle was different to the previous one, requiring a faster lift in the Fed Funds rates and a faster reduction in the balance sheet.
Bank of Canada Governor Macklem solidified market expectations of kicking off the rate hike cycle at the next meeting early March, saying that the current rate of inflation was “too high” and the economy would need higher interest rates.
Yesterday, the domestic rates market saw a steepening bias, with the 2-year swap rate down 2bps to 2.48% and the 10-year rate up 4bps to 2.96%. The NZGB curve saw a similar profile, ahead of a tender of 10-yr and 15-year bonds today.
So far in NZ the Omicron wave, as measured by official case numbers, is looking more like a ripple, with recent new daily case numbers running around the 200 mark. Based on the “expert” opinions that when Omicron was in the community then case numbers could expect to triple every few days, we estimate that the current run rate should be at least around 800-900 by now. However, the lower reported figures reflect low testing numbers and the true case numbers are likely much higher, with the draconian isolation rules (up to 24 days for some household members) acting as a strong disincentive to get tested.
Whatever the true figures, the economic hit is still real, with dead CBDs in the main centres and a daily churn of cancelled events being obvious warning signs. This is something that could continue for months. A flat Omicron curve might be good in terms of reducing pressure on the hospital system, but could well be more damaging for the economy if it means an extended period of weak economic activity.
On the economic calendar, US CPI data is the key release tonight, 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.
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