The new week has begun with global bond markets under significant pressure, seeing rates surge to fresh multi-year highs, with more hawkish comments by Fed Chair Powell adding to upward momentum in yields. Under the circumstances, a modest fall in the S&P500 doesn’t look that bad. Currency markets only show modest movements, with the NZD hovering below the 0.69 mark.
In his first post-FOMC meeting speech, Chair Powell has said that “we will take the necessary steps to ensure a return to price stability”, suggesting that the central bank could raise the Fed Funds rate by more than 25bps at a meeting or meetings and tighten beyond neutral into a more restrictive stance. He noted that the current commodity price shock was not typical and “the risk is rising that an extended period of high inflation could push long-term expectations uncomfortably higher, which underscores the need for the committee to move expeditiously”.
A big selloff in global bond markets was already underway before Powell’s speech was released and his comments sent rates even higher. US Treasury yields are significantly higher across the curve. With 2-5 year rates up 17bps, the 10-year rate up 15bps and the 30-year rate up 10bps. This takes the 2-year rate above 2% for the first time this cycle, while the 10-year rate has reached a shade under 2.3%. The Fed Funds future curve shows a better than even chance of a 50bps hike at the next meeting in May.
European yields also rose across the curve, with the UK 10-year rate up 14bps and core European 10-year rates up in the order of 9-10bps.
Under the circumstances of much higher rates across the curve and the large gains seen last week, equity markets haven’t performed too badly, with the S&P500 currently down just 0.5% and the Euro Stoxx 600 index closing flat for the day.
In other news, Ukraine rejected Russia’s ultimatum on Monday that it surrenders the port city of Mariupol. Military experts are saying that after Russia has failed to take any cities so far, it has changed its strategy and is now deliberately targeting civilian population centres. A Ukrainian negotiator on peace talks said that Russia had eased its stance on some issues but that talks are expected to take several more weeks at least.
Yesterday, Chinese banks left lending rates unchanged, as expected, but the market is expecting a cut to the reserve requirement ratio soon, following Vice Premier Lui’s commitment last week to make monetary policy more proactive to support the economy. China’s central bank is an outlier in the realm of major central banks, looking to ease policy while all others are looking to tighten.
Currency markets have had a quiet start to the week. Against a backdrop of modest changes, the NZD and AUD have underperformed, with the NZD slipping to 0.6880 and the AUD dropping below 0.74, eating into the solid gains seen last week. Despite Powell’s hawkish comments, the USD is relatively flat for the day.
The domestic rates market was quiet yesterday, with a slight downside bias to long-end rates but not much change otherwise. The 14bps lift in the Australian 10-year bond future yield since the NZ market close will see rates jump higher on the open today.
The economic calendar is light this week. Trade data yesterday showed further deterioration in NZ’s trade balance through to February. The quarterly Westpac measure of consumer confidence today should be weak, if the monthly ANZ survey is anything to go by, which already shows consumer confidence lower than the depths of the GFC.