Multiple drivers push global rates much higher; US 10-year rate up 16bps, aided by hawkish speech from Fed Governor Brainard. Australian rates and AUD higher after hawkish RBA statement

Global rates are significantly higher, driven by a number of factors including the hawkish pivot from the RBA, hawkish comments from the Fed’s Brainard, French political risk and the end of the ECB’s pandemic bond buying programme The US 10-year rate has hit a fresh high for the cycle just shy of 2.57%. Higher global rates have driven the yen weaker, while EUR is weak as the EU mulls fresh sanctions. The AUD has been the strongest performer over the past 24 hours, while the NZD is flat, after briefly breaking through 0.70.

The bond market has been in focus, with a notable sell-off that sees significant broadly-based increases. German and UK 10-year rates are up 11bps, while France is up 15bps. The backdrop of higher European rates spilled over into a higher US 10-year rate, with an added kicker following a hawkish speech from Fed Governor Brainard. The US 10-year rate reached an overnight high just shy of 2.57%. and is currently up 15bps to 2.54%.  With the sell-off led by the long end, the 2-year rate is up “only” 8bps to 2.50%, so the 2s10s yield curve is back in positive territory.

In Europe, political risk has risen in France, with a closing of the gap in polls, showing far-right Presidential candidate Le Pen gaining ground on President Macron. The first round of voting begins Sunday. Traders also note that the ECB has stopped buying bonds through its pandemic bond buying programme, although purchases via the asset purchase programme remain.

Fed Governor Brainard, one of the more respected voting members on the FOMC and the next vice-Chair subject to Senate confirmation, delivered a hawkish speech with the market focused on her comments on the balance sheet reduction. She said that the Fed would start to reduce its balance sheet at a rapid pace as soon as the May meeting and noted “given that the recovery has been considerably stronger and faster than in the previous cycle, I expect the balance sheet to shrink considerably more rapidly than in the previous recovery, with significantly larger caps and a much shorter period to phase in the maximum caps compared with 2017-19”.

The rise in European and US rates followed higher rates in Australia, after the RBA showed a clear hawkish pivot in its latest policy update.  The Bank removed the word “patient” in reference to potential rate increases and signalled that its actions would be dependent on upcoming data over coming months. A rate hike no later than June now looks likely, and a stonker of a CPI report later this month could see a hike as soon as next month, ahead of the Federal election.

Even though the market has been much more hawkish than the RBA and has been long expecting a hawkish capitulation, rates and the AUD shot up after the announcement. The Australian 2-year swap rate ended the day 29bps higher, building in an extra rate hike into the near-term path. The 3-year bond future is up 21bps in yield terms since the announcement, while the 10-year rate is 15bps higher. Interbank 30-day rates, indicative of where the market sees the cash rate heading, closed just under 2% for December this year and 3% for June next year, consistent with an aggressive tightening path for the RBA over the coming year or so.

In other news, after the EU indicated further sanctions against Russia, some more detail has emerged. The EU is proposing to ban most Russian ships and trucks from entering the bloc as well as Russian coal imports. Oil and gas has yet to be banned but a debate would proceed on this and diplomats note that momentum behind introducing a phased embargo of Russian oil supplies is gathering. Political figures and family members would be added to the sanctions, including Putin’s daughters. Oil prices have been surprisingly well-behaved given this backdrop, with Brent crude down slightly to USD106 per barrel.

The US is also looking to step up its sanctions to include a ban on all new investments in Russia, and increasing sanctions on financial institutions, state-owned enterprises and Russian officials.

The economic calendar has been light. The US ISM services index increased 1.8pts in March to 58.3, close to expectations, a reflection of the fading impact of Omicron which saw increased mobility. The accompanying industry comments were consistent with ongoing supply chain challenges and worsening inflationary pressures.
In currency markets, the RBA’s hawkish pivot has seen the AUD as the best performer over the past 24 hours. It was up over 1.6% at one stage hitting 0.7660, before Brainard’s hawkish speech sent the USD on a higher trajectory and the AUD is back down to 0.7590, wiping out more than half of its post-RBA gain.

With the tailwind from a stronger AUD, the kiwi flew to a high of just over 0.7030, its first look above 0.70 since November, but the recovery in the USD sees the NZD back down to 0.6960, little changed from this time yesterday. The consistent theme since June last year for currencies has been that what the Fed says matters much more than the RBNZ (or RBA). RBNZ or RBA actions can have a fleeting impact on the antipodean currencies, but ultimately expectations for Fed policy are in the driving seat.

Talk of EU sanctions against Russia continues to scare the euro into submission, with added USD strength adding to its demise, seeing EUR on the verge of breaking below 1.09. The higher global rates backdrop also sees a weaker yen, with USD/JPY back up to 123.60. The NZD is higher on all the key crosses apart from NZD/AUD, which fell to its lowest level in over a year to 0.9154 and currently sits slightly higher. NZD/JPY is back above 86, NZD/EUR is 0.6380 and NZD/GBP is 0.5320.

The GDT dairy auction price index recorded a back-to-back fall, down 1%, consistent with indicators that were pointing to a weak/flat result. Whole milk powder fell 1.5% while skim milk powder rose 1.0%. Recent price weakness follows a blistering upward run, so prices remain at historically high levels that support strong growth in farm incomes this season.

In the domestic rates market the pricing of new issuance of LGFA bonds worth $1.105b over three tranches spilled over into the NZGB market.  NZGBs fell 2-4bps across the curve, with the market closing before the RBA’s announcement. Expect a big lift in rates as the market opens today. The swaps market showed a flattening bias, with ongoing payside pressure in the 2-year rate seeing the yield 2bps higher at 3.42%, while the 10-year rate fell 1bp to 3.47%.

The economic calendar remains light. There will be some interest in the FOMC minutes of the March meeting but given the number of Fed speakers since that meeting it is hard to believe they will reveal anything new.