Risk sentiment has improved since the NZ close, as the world tries to assess President Putin’s next move, after his first step towards a war with Ukraine. US equities are down for the day, but not as much as early trading in futures suggested. The US 10-year rate has headed back up towards the 2% mark. The NZD, AUD and EUR have outperformed overnight, with the NZD up to 0.6750 ahead of the RBNZ MPS today.
The market remains fixated on European geopolitical developments, with some market volatility on the ebbs and flows of probabilities for a full-on invasion of Russian into Ukraine. While developments turned nasty yesterday, there remains some doubt about whether a full-scale war remains imminent.
Soon after we went to print yesterday, President Putin said that Russia would recognise the independence of Donetsk and Luhansk, territories in Ukraine controlled by Russian-backed separatists. This breaches the 2015 Minsk peace agreement and gave Putin a pretext to send military forces into Ukraine, which soon followed.
World leaders have condemned Putin’s move and kicked off the process of sanctions. These have been light-touch so far, as leaders await Putin’s next move. There will be interest in whether Russian forces attempt to break through Ukrainian defences to try and seize the two-thirds of the Donetsk and Luhansk regions that Russia claims, but doesn’t control. Given Putin’s rhetoric, this must surely be seen as likely.
Germany has halted approval of the Nord Stream 2 gas pipeline, seeing European gas prices rise 10%, but this is nothing compared to the massive price gains seen late last year on fears of a winter gas shortage, which subsequently reversed. The gas price remains below its three-month average.
UK PM Johnson announced a “first tranch” of sanctions on five Russian banks and three high net worth individuals. The EU also proposed a first package of sanctions, targeting those behind the decision as well as banks that finance Russian operations in the territories. And the EU would also “target the ability of the Russian state and government to access the EU’s capital and financial markets and services”.
NATO Secretary General Stoltenberg said there is every indication that Russia is planning a full attack. Clearly, that remains a key risk but the market has traded with more positive sentiment compared to the NZ close.
S&P futures were down more than 2% yesterday, but sentiment improved from early European time, and the S&P500 opened after the long weekend down less than 1%. The US 10-year rate was well down on the Asian open, falling to a low of 1.84% and traded at 1.85% at the NZ close, but has since ramped back up to 1.96%, paring that upside as we go to print to 1.93%. Brent crude traded as high as USD99.50 last night, but has since fallen back to USD97, up 2% for the day.
In currency markets, of the key majors we follow, the NZD, AUD and EUR have been the best performers overnight, consistent with the theme of better risk sentiment and no war in Europe, yet. The NZD traded as high as 0.6755, before nudging a bit lower. The AUD is at 0.7220, while NZD/AUD is up to 0.9340, at the higher end of its trading range this month ahead of the RBNZ’s MPS today.
The EUR is slightly higher for the day at 1.1335 and with NZD outperformance, NZD/EUR is up to a four-week high of 0.5950. With the better risk backdrop, JPY is weaker and NZD/JPY is up to 77.5.
Financial markets could remain whippy over coming days and weeks as Putin’s intentions are revealed.
Key economic data released overnight all surprised to the upside. German business expectations, as measured by the IFO survey, bounced back stronger than expected in February, reaching a seven-month high of 99.2. This likely reflected less concern about the path of the pandemic and an easing of supply chain issues. The Markit surveys for the US suggested a bounce-back in activity in February, as they did for Europe, reflecting a post-Omicron effect driving improved demand. The inflation indicators strengthened further, with the prices charged indicator for goods and services rising to a record high (the survey only dates back to 2009). The Conference Board measure of US consumer confidence dropped to a five-month low, but remains well above the equivalent University of Michigan index and the fall was slightly less than expected.
Domestic rates were pushed lower on global forces, but some nerves ahead of the RBNZ MPS today saw a sticky short-end and therefore some curve flattening. The 2-yeear swap rate rose 1bp to 2.56% while 10-year swap fell 5bps to 2.92%. The NZ 10-year rate fell 6bps to 2.71%. Since the NZ close, the Australian 10-year bond future is up 5bps in yield terms, setting the scene for higher long term rates on the open.
In the day ahead, Australian wage data will be closely watched, given the RBA’s focus on labour market developments as a possible source of sustained higher inflation. A 0.7% q/q increase, as expected by the market, would be the strongest in nearly eight years.
Then focus will turn to the RBNZ’s MPS at 2pm. While a 50bps hike can’t be ruled out, we are aligned to the market view that a 25bps move is the most likely action, alongside a message that a series of further rate hikes is likely needed this year to bring inflation under control. NZ’s inflationary pulse is very high, but the RBNZ doesn’t need to confuse the market with a more aggressive rate path than is already priced in. Market pricing is already consistent with about 25bps every meeting this year and further hikes into next year, which take the OCR to about 3%. Unless the RBNZ thinks otherwise and is more hawkish than already reflected in market pricing, then any post MPS reaction for the NZD should be fleeting. With a small chance of a 50bps move priced in, short-term rates would fall on just a 25bps increase and exaggerated by perceptions that any future 50bps moves could effectively be ruled out. The longer end of the curve remains at the mercy of global forces.
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8 Comments
What does 'confuse the market' mean? Not doing what bank economists have helpfully suggested? If interest rates have already factored in the expected raises in the OCR, then the RBNZ will have to raise by more (or less) than expected to have an impact. I wouldn't describe this as confusing the market, but rather, impacting it.
The market in my view is overly optimistic regarding war in the Ukraine and its risk assessment unduly rose tinted . Putin's speech was just a self justification for his actions his rambling rewrite of history as it suits Putin was quite scary no logic was allowed to forestall the writing of a good story. I would not be surprised to see the reserve bank not raise rates at all continuing the track record of softly , softly until the impact of inflation is undeniable and widespread, which will occur as the Russian invasion impacts energy prices including fertilizer.
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