Global rates push higher on Friday to fresh multi-year highs. USD hits highest level in nearly two years. Big week ahead, with RBNZ, Bank of Canada and ECB meetings; US CPI to hit fresh multi-decade high

Newsflow was light on Friday but the great global bond market selloff continued, with the US 10-year rate reaching a fresh three-year high of 2.73%. The USD reached its highest level in nearly two years before ending the day flat. Against a backdrop of slightly weaker risk appetite, the NZD was the worst performer on Friday, down 0.6% for the day to just under 0.6850. The week ahead is a busy one, with policy updates from the RBNZ, Bank of Canada and ECB, as well as US CPI data.

The annus horribilis for the bond market continued on Friday, as investors weigh up how much global monetary policy tightening will be required to bring inflation under control. The UN Food and Agriculture world food price index soared 12.6% m/m in March, the second highest monthly increase on record, not that we needed reminding of the significant global inflationary pulse.

Global 10-year rates around the world rose to fresh multi-year highs. Another 2-4bps increase in rates across Europe and a 4bps lift in the US 10-year rate capped off another week of strong rate increases – a week in which investors mulled the impact of a rapid reduction in the size of the Fed’s balance sheet, following Fed Governor Brainard’s hawkish speech earlier in the week and the FOMC minutes which discussed a possible $95b monthly cap for the pace of reduction in holdings of Treasuries and asset-baked securities. The US 10-year rate reached its highest level in nearly two years of 2.73%, before ending at 2.70%, up 32bps for the week. The 2-year rate rose 5bps on Friday to 2.51%. Market sentiment wasn’t helped by Goldman Sach’s chief economist saying that the risk around his baseline view that the Fed Funds rate reaches a little over 3% by mid-2023 was that rates would be needed to rise significantly higher, to the 4%-plus range.

The domestic rates market on Friday showed only small movements in yield, but that capped off another week of strong rate increases, with 2-10 year swaps and NZGB rates up 17-21bps.

Higher US-global rate spreads continue to support the USD, and the DXY index temporarily broke up through the 100 mark for the first time since mid-2020 before closing the day flat at 99.8. The NZD was the weakest of the majors, down 0.6% to just under 0.6950, against a backdrop of slightly weaker risk appetite. This saw it modestly weaker on all the key crosses. A smaller fall in the AUD meant the NZD/AUD cross closed around 0.9185.

For the week, the USD was the strongest against all bar NOK, with the yen 1½% weaker against the backdrop of higher global rates and, although the euro was relatively flat at 1.0880 on Friday, it was also down 1½% for the week. In the first round of Presidential voting in France, partial poll results give President Macron 29% of the vote and far-right candidate Le Pen with 24%. The two will face off in the final round of voting on 24 April.

The only data of note released was Canada’s employment report, which showed another strong monthly increase in payrolls, driving the unemployment rate down two-tenths to 5.3%, its lowest rate in monthly data dating back to 1976. The data reinforced rate hike expectations at the Bank of Canada’s meeting this week, with the market pricing in more chance of a 50bps than 25bps hike, and the policy rate getting close to 3% within the next 12 months.

The S&P500 closed down 0.3%, while the Nasdaq index fell 1.3%, some nerves evident as rates continue their relentless rise. The S&P500 showed a 1.3% fall for the week, the first weekly fall in four weeks, while the Nasdaq’s weekly fall was a chunky 3.9%, with the composition of companies on that bourse seen to be more sensitive to higher bond yields.

As we look to the week ahead, if my twitter feed is representative, then China might well be in the spotlight with the harsh lockdown in Shanghai, recently extended, resulting in civil unrest, with reports of starving families and looting of supermarkets. Shanghai reported 25,000 cases of the virus on Sunday. The lockdown is having a significant impact on supply chains, spilling over to the rest of the world via global trade channels.

In the day ahead NZ card spending data are released, which will shape how bad Q1 was for spending during the Omicron wave. China inflation data and UK activity data including monthly GDP round out the global calendar.

In the week ahead, domestically the focus will turn to the RBNZ’s MPR on Wednesday, where most would agree it’s a lineball call between the Bank delivering either a 25bps or 50bps hike to either 1.25% or 1.5%. With the market already pricing in the OCR heading to 4%, it’s hard to believe that the Bank could be any more hawkish than implied by that. One day ahead of the MPR, the QSBO should be consistent with a stagflationary environment, with poor levels of confidence and activity and extremely high inflation indicators.

Globally, the Bank of Canada is widely expected to deliver a 50bps hike.  The ECB’s policy update won’t contain any new forecasts, but language should move in a more hawkish direction after the latest 7.5% y/y CPI print, with a likely nod to end QE by the end of June, which will then set the scene for rate hikes beginning in the second half.  In global data, US CPI inflation data will be in the spotlight, with the headline rate expected to shoot up to yet another multi-decade high of 8.4% y/y, and the core rate nudging up to 6.6%.