Global rates have shown further signs of stabilising overnight on hopes that inflation may be close to peaking. The US 10-year Treasury rate has fallen to around 2.68%, helping to boost equity markets and driving a fall in the USD. Both the RBNZ and Bank of Canada have delivered 50bps rate hikes over the past 24 hours. Despite the 50bps hike, the RBNZ’s statement was seen as ‘dovish’ relative to very elevated market expectations and NZ rates and the NZD have fallen sharply, with the NZD/AUD cross hitting its lowest level in 18 months.
Starting with the RBNZ: at yesterday’s MPR the Bank raised the OCR by 50bps, to 1.50%, its first 50bps hike since 2000. Markets had been pricing around a 75% chance of such a move while economists had generally couched the decision as a line-ball call with a 25bps hike. The RBNZ framed the larger-than-usual rate hike as a bringing forward of tightening, to reduce the risk inflation expectations drift away from the 2% target, rather than a signal of a higher end point for the OCR. In addition, with the market pricing a high chance of a 50bps move, doing so wouldn’t be a major surprise. Further OCR hikes lie ahead, and we expect a follow-up 50bps hike in May, which would take the cash rate to around its ‘neutral’ rate of 2%, and 25bps thereafter to a peak of 3% at the end of this year.
The market went into the MPR with elevated OCR expectations. Heading into the meeting, the market was pricing a peak in the OCR of around 4.2%. In contrast, the statement outlined the MPC “remained comfortable with the outlook for the OCR as outlined in their February Monetary Policy Statement ” which, for recollection, showed a peak in the OCR of 3.35%. Post-MPR, the market pared back its OCR expectations, taking almost a full hike out the profile for 2022 and repricing the terminal OCR back below 4%. The market is pricing around a 65% chance of a follow-up 50bps hike in May. On the day, the 2-year swap rate was 15bps lower, at 3.48%, although this only takes it back to the levels of around a week ago. Longer-term rates were lower as well, by 12bps at 5-year and 7bps at 10-year, albeit lagging the moves at the short end of the curve.
After a brief algo-driven spike higher to 0.69 after headlines of a 50bps OCR hike hit the screens, the NZD has been under pressure since, reflecting the pullback in RBNZ rate expectations. The NZD is more than 1% lower than it was immediately before the MPR and is now trading around 0.6790. The NZD/AUD cross is down around 0.9% from its pre-MPR levels and on track for its lowest close in 18 months, at around 0.9120.
After the RBNZ, the next cab off the rank was the Bank of Canada, which raised its policy rate by 50bps overnight, to 1%, as expected, its second hike of the cycle. The BoC also said it would commence ‘quantitative tightening’, or ‘QT’, later this month, with its bond portfolio expected to shrink around 40% over the next two years as it lets its bond holdings roll off. The BoC said further tightening should be expected as the cash rate is lifted towards neutral, seen between 2-3%, with Governor Macklem saying it was prepared to move “forcefully ”. The BoC is widely expected to follow up with another 50bps hike at its next meeting in early June. The CAD has outperformed over the past 24 hours, up by around 0.6%, also helped by a further 4% rally in oil prices.
Global bonds finally appear to be finding their footing, after what has been an immense sell-off over recent months. The US 10-year rate has extended yesterday’s post-US CPI move lower and has fallen 4bps to 2.68%, while the US 2-year rate is down 7bps, as the market has started to moderate its Fed rate hike expectations. A 50bps Fed rate hike is still almost fully-priced for the May meeting and there is just over 200bps of hikes priced by year end. We should see further falls in NZ rates this morning as the market further digests the RBNZ MPR and adjusts to the overnight moves in US Treasury rates.
Equity markets have rebounded overnight helped by the falls in bond yields. Tech stocks, which tend to be more sensitive to longer-term rates, have outperformed, with the NASDAQ rising 1.9% against a 1% increase in the S&P500. The corporate earnings season is underway, with JP Morgan reporting lower than expected earnings overnight, in part due to a modest increase in loan loss provisions to reflect emerging downside risks to the economy. Consensus expects 4.5% annual earnings growth for S&P500 companies for Q1.
After reaching a fresh 20-month high at one point overnight, the USD has come under downward pressure from the falls in US rates. The EUR came close to touching its lowest level in almost two years, but it has since recovered to 1.0885. The latest opinion polls show Macron retains a lead over far-right Marine Le Pen in the second round of voting for the Presidential election, albeit one which is probably too close for comfort. Meanwhile, USD/JPY hit a 20-year high of 126.32 yesterday afternoon before turning lower as US Treasury rates fell away. Japanese Finance Minister Suzuki called moves in the exchange rate “very problematic ”, suggesting a growing discomfort amongst government officials at the pace of the yen’s decline, which is increasing cost of living pressures.
In China, Bloomberg reported that officials will trial a shorter isolation period of 10 days, down from the previous 14 days, in Shanghai and seven other cities. The change comes amidst speculation that the authorities are moving closer to easing lockdown restrictions in Shanghai, with residents of some housing complexes having already been allowed out of lockdown and officials having clarified they are targeting zero cases in the community, not zero cases overall. Meanwhile, China’s State Council foreshadowed an imminent PBOC cut to bank reserve requirements as policymakers step up support for the economy.
Economic data continues to show a very strong global inflationary pulse. US core PPI was almost double market expectations, jumping 1% on the month to an annual rate of 9.2% y/y. Market reaction was limited, with investors having already digested yesterday’s more important US CPI release, which showed some tentative signs of easing core inflation pressures. In the UK, CPI was much higher than expected, with headline inflation hitting a 30-year high of 7% y/y and core inflation surprising to the upside at 5.7% y/y. The market is pricing around a 20% chance of a 50bps Bank of England rate hike next month.
The ECB meeting is the highlight in the session ahead, with the central bank widely expected to announce an end to its bond buying later this quarter, paving the way for rate hikes in the second half of the year. The ECB hasn’t raised interest rates in more than ten years, the last time an ill-fated move right ahead of the European sovereign crisis. US retail sales, jobless claims and confidence data are released tonight. In Australia, our NAB colleagues expect the unemployment rate to fall to a post-1974 low of 3.9% on the back of a 50k employment gain while, locally, the Manufacturing PMI is released. We’ll also keep an eye out for media interviews with RBNZ officials today.