Headlines around potential war between Russia and Ukraine and talk around the US monetary policy outlook continue to buffet markets, creating some volatility. The net result is a mixed showing for US equities, much weaker European equities, while US Treasury yields have reversed Friday’s move, pushing significantly higher. The USD is on the strong side of the ledger, seeing the NZD test the 0.66 mark again.
After the US warned at the end of last week that a Russian invasion of Ukraine was imminent, there were market rumours in early European trading that Putin had made the decision and had advised his forces. This rumour was debunked after President Putin staged a televised meeting with his foreign and defence ministers showing that he was aiming for a diplomatic solution and was not preparing for war. On air, he agreed to a proposal by his foreign minister that Russia continues talks with the US and its allies and the Defence Minister reported that some of Russia’s massive military exercises had already concluded and others will end later. German Chancellor Scholz is travelling to Ukraine and Russia in a diplomatic effort to avoid war.
Rumours of impending war and the debunking thereof saw some volatility in S&P futures, seeing them collapse around 1½% late last night, before rebounding sharply after the TV appearance of Putin. The S&P500 is currently flat, while the Nasdaq index is up 0.8%. The Euro Stoxx 600 index closed down 1.8%, with some catch-up to the late Friday selling pressure in the US being a factor for the worse performance.
With better mood music around the Russia-Ukraine war, the US Treasuries market has seen a reversal of Friday’s sharp move down in yield that followed the White House’s warning of imminent war, and adding to the bond-bearish tone has been more comments on the US monetary policy outlook by Bullard.
St Louis Fed President Bullard was at it again, making hawkish comments in a CNBC interview, reaffirming his view that the Fed should tighten 100bps over the next three meetings, that would include one 50bps move. With broadening and possibly accelerating inflation, he said that relative to previous cycles “we need to front-load more of our planned removal of accommodation…our credibility in on the line”. Arguably the Fed’s credibility has already been shot – after all it is still buying Treasuries every week to suppress yields (and will do so for another few weeks), and the Fed Funds rate is still near zero despite inflation of 7.5%.
Kansas City Fed President George’s comments were less panicked and more measured than Bullard. She told the WSJ that she hadn’t yet formed a view over how much the Fed would need to raise interest rates this year and said it was too soon to say whether the Fed should raise rates by 50bps rather than 25bps in March. She added “what we have to do is be systematic…it is always preferable to go gradual…given the uncertainties around the pandemic…I’d be hard-pressed to say we have got to get to neutral really fast”.
The US 2-year rate is currently up 10bps to 1.60% while the 10-year rate is up 7bps to 2.00%, the big whipsawing moves over the past few sessions being a trader’s nightmare. The Fed Funds market is back to pricing in close to the equivalent of seven 25bps rate hikes over the remaining seven FOMC meetings this year, with an 85% chance of the March meeting being a 50bps move. The lift in US rates went against the grain of a slight fall in French and German 10-year rates.
There have been no key economic data releases, but we did see that a NY Fed survey showed median 1-year inflation expectations declining by 0.2% to 5.8% and 3-year ahead inflation expectations declining 0.5% to 3.5%, the lowest since April.
Higher US-global rate spreads have supported the USD, as it shows broadly based gains to start the week, with CAD the only major keeping pace. EUR, GBP and JPY have all started the week with falls in the order of 0.2-0.4% against the USD. The AUD has performed relatively well, fairly flat around 0.7130.
The NZD has been the worst of the key majors, down 0.4% from last week’s close to 0.6620, and having another brief peek below 0.66 during the night. Yesterday, the second-tier NZ economic data released showed a whiff of stagflation. The performance of services index fell well into contractionary territory and with clear evidence of a suffering hospitality sector under government-imposed COVID19 restrictions, while food price inflation showed more than the usual seasonal lift in January, taking annual inflation to 5.9% y/y. Alongside ongoing upside pressure in petrol prices, we revised up our Q1 CPI pick to 6.6% y/y. Higher food and energy prices alongside other general price increases are acting as a material ‘tax’ on growth. Inflationary forces are adding to the squeeze on consumer and business purchasing power, a factor behind lower economic confidence of late and adding to downside growth risks.
Domestic rates fell in response to the offshore moves Friday night, but not by as much as one might have thought, with 10-year swap and NZGB rates down by only 3bps, while the 2-year swap rate down 1bp. That’s not such a bad thing, as it will likely limit the upside move in yields today. The volatility in global rates will be discouraging offshore investors to participate in the NZ market.
In the day ahead, we’ll be keenly watching REINZ data for any evidence of the hit to the housing market from higher mortgage rates and the impact of the CCCF Act. On the global side, Japan Q4 GDP data, UK labour market and US PPI inflation data will be of some passing interest.
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