Strong US jobs report adds to the case for the Fed to hike in 50bps steps. Euro area inflation of 7.5% adds to the case for the ECB to end QE and raise its policy rate. Record low NZ consumer confidence raises questions over appropriate NZ policy reaction

Another strong US employment report drove US short end rates higher on Friday, resulting in further curve flattening, seeing the 2s10s curve closing inverted for the first time this cycle. US equities remained unperturbed and closed modestly higher. Currency movements were modest Friday night, with the NZD ending the week around 0.6925.

The US employment report was strong, with 431k of non-farm payrolls added in March and 95k of net revisions making the level of employment slightly ahead of consensus. The unemployment rate fell two-tenths to 3.6%, almost back down to the pre-COVID trough of 3.5%. Average hourly earnings rose 5.6% y/y, in line with expectations.

The data aligned with the Fed’s narrative of a very tight labour market, alongside a range of other data, clearing one hurdle to raise rates by 50bps at the next meeting. Fed Fund futures currently price in 45bps worth of hikes for the May meeting, followed by 44bps for June, suggesting a high chance of back-to-back 50bps hikes by mid-year. In an FT interview over the weekend, San Francisco Fed President Daly said that the case for a 50bps hike at the next meeting had grown.  She added “I’m more confident that taking these early adjustments would be appropriate” and that getting to neutral efficiently translated into “multiple” half-point adjustments. In a speech on Saturday, NY Fed President Williams said there was a clear case in getting policy back to neutral but how quickly was data dependent and he didn’t mention the size of future rate increases he favoured.

The data added to upside pressure for the 2-year rate, which ended 12bps higher on the day to a fresh cycle high of 2.46%. With a more modest 4bps lift in the 10-year rate to 2.38%, the 2s10s yield curve closed in negative territory for the first time this cycle at minus 7bps. The forwards curve is consistent with the yield curve becoming more negative over the coming 12 months, adding to the chance of the US economy entering an economic recession sometime next year.

The US ISM manufacturing index was largely ignored, which unexpectedly fell to 57.1, its lowest level in 18-months. New orders and production gauges fell notably, while the employment index was stronger. The prices paid index shot up by 11.5 points to 87.1, on the back of recent strength in commodity prices.

US equities moved in and out of positive territory during the day and a strong close saw the S&P end the day with a 0.3% gain. That meant the index closed higher (by less than 0.1%) for a third consecutive week, still unperturbed by the higher rates and inverted yield curve backdrop.

Euro area CPI inflation surged to a record high of 7.5% y/y, well above consensus estimates, which hadn’t incorporated the very strong regional figures released in the preceding days. While the core CPI also rose to a record high, at 3.0% it was slightly below expectations. The data adds to the urgency for the ECB to end QE and begin a rate hike cycle.

It is hard to believe that any Governing Council member believes that a negative policy rate remains appropriate with inflation rocketing ahead. However, the resident dove on the committee, Chief Economist Lane, continued to run the line that the ECB would be looking to end net purchases in Q3, but “we will have to think again” if the outlook deteriorates by so much that the inflation outlook weakens. A growing number of members have been getting increasingly nervous and sceptical of Lane’s view that inflation will drop back.

Despite the strong euro area inflation data, EUR remained on the soft side, closing below 1.1050, but the currency was still the best performing of the key majors for the week. Currency movements were modest across the majors on Friday night and for the week overall. The NZD was flat around 0.6925, while the AUD continued to oscillate close to 0.75.

NZ consumer confidence on the monthly ANZ survey slumped further in March, hard to believe when it was already sitting at a record low, putting it even weaker than the depths of the GFC. The Omicron wave, the cost-of-living crisis and weaker housing market all look to be contributing. The weak domestic demand backdrop adds to the complexity of the RBNZ’s imminent monetary policy decision on whether to accelerate the path of tightening or continue to raise rates in 25bps clips.

The OIS market prices in 42bps of hikes for the next RBNZ meeting in just over a week. The 2-year swap rate closed up 9bps on Friday to a fresh cycle high of 3.38%. Rates were higher across the curve, with the 5-year rate up 12bps and the 10-year rate up 10bps. The NZGB market fared relatively better, with 5-10 year rates up in the order of “only” 5-6bps, contributing to wider swap spreads. On Saturday morning FTSE Russell confirmed that NZ would be added to the FTSE World Government Bond Index from November, with a projected weighting of 0.19%. This is in line with our calculations and the provisional decision made over a month ago.

The economic calendar in the week ahead is very light. The RBA policy decision tomorrow is a non-event, with no change in policy expected ahead of the May Federal election, but another incremental shift to more hawkish commentary wouldn’t look out of line as everything points to the RBA remaining well behind the curve. FOMC minutes from the March meeting are released and a number of Fed speakers will be on the wires.