The great global bond sell-off has resumed over the long weekend, with the US 10-year rate hitting a fresh cycle high of 2.88%. NY Fed President Williams has cemented expectations for a 50bps hike next month by saying such a move was “a very reasonable option ” while oil prices have increased sharply on supply concerns, adding to inflationary concerns and boosting bond yields. The USD is broadly stronger against a backdrop of higher Fed rate hike expectations and softer risk appetite. USD/JPY has reached a new 20-year high, the EUR has fallen to a two-year low after the ECB failed to live up to elevated market expectations and the NZD has fallen back towards 0.67, its lowest level in eight weeks. An interview with RBNZ Governor Orr is released at 8am this morning.
After a few days of consolidation, the global bond sell off has picked up afresh following hawkish comments from NY Fed President Williams (see below) and a further increase in oil prices. The US 10-year rate, which was trading between 2.65% and 2.70% on Thursday afternoon, has blasted up to a fresh cycle high of 2.88% (currently 2.86%). The move higher in US rates has been fairly uniform across the curve, with the 30-year rate up by around 15bps from Thursday afternoon and approaching 3% for the first time since 2019. Assisting the move higher in bond yields has been a 5% increase in oil prices over the past few sessions on news that Libya had shut its largest oil field. The US 10-year breakeven inflation rate has rebounded to almost 3%.
New York Fed President Williams, whose views are seen as reasonably aligned with Chair Powell, said he thought a 50bps hike next month was “a very reasonable option” considering the cash rate was still “very low .” The comments cemented expectations the Fed will quicken the pace of rate hikes from next month, following in footsteps of the RBNZ and Bank of Canada which both raised rates by 50bps last week. Fed Chair Powell has a chance to rubber stamp a 50bps hike later this week; he speaks twice on Thursday, just before the pre-meeting blackout period starts. The market prices around 215bps of Fed rate hikes by the end of the year which, if realised, would put it on par with 1994 for the most aggressive pace of Fed tightening over the past thirty years.
The EUR has fallen to a two-year low, below 1.08, as the ECB meeting on Thursday night failed to live up to the elevated market expectations. The ECB reaffirmed that QE bond purchases would stop in Q3, disappointing investors who were looking for the ECB to set out a firm end date for QE later this quarter. Rate hikes would be “gradual” and take place “some time after” the end of bond purchases, which Lagarde reiterated could be anything from “a week to several months”. Lagarde flagged the upcoming meeting in June meeting as a key decision point where the Governing Council will assess new economic forecasts and overlay an “element of judgement” . After the meeting, Bloomberg reported that a consensus had emerged within the Governing Council to start raising interest rates in Q3, likely in 25bps increments.
The market pared back ECB rate hike expectations as Lagarde failed to provide a firm timeframe around ending QE. A rate hike in July is just less than 50% priced in now, having been almost 70% priced before the meeting. The market is fully pricing the first 25bps hike by September and a second 25bps hike by December, which would take the deposit rate back to 0% for the first time since 2014. The market expects the ECB will likely, at its June meeting, announce an end to QE in July, setting up a September hike, although July could still be a plausible option for the first hike if purchases came to an end at the start of the month. Unlike the US, European markets have been closed over Easter. Thursday night saw the German 10-year rate increase 8bps, to 0.84%, near its highest level since 2015, despite the pullback in near-term ECB rate hike expectations.
The USD is broadly stronger amidst a backdrop of rising Fed rate hike expectations and softer risk appetite. USD/JPY has continued to shadow US Treasury yields higher, hitting a fresh 20-year high this morning, just below 127. BoJ Governor Kuroda called the depreciation in the JPY “very rapid”, although he has not yet signalled any intention to shift away from the BoJ’s ultra-easy monetary policy stance. The NZD, which briefly touched 0.69 after the RBNZ MPR last week, has fallen to around 0.6725, its lowest level in eight weeks.
Equity markets have come under pressure as bond yields have surged higher, with the S&P500 down around 1% from Thursday morning’s close and the NASDAQ almost 2% lower. Trading volumes have been subdued over the long weekend. Higher bond yields impact equities because they raise the discount rates that are used to value future cash flows. Higher bond yields also reflect growing expectations of significant monetary policy tightening by the Fed which is likely to slow growth and hence dent corporate earnings. Corporate earnings season gets into full gear this week with Johnson & Johnson, Tesla and Netflix among the big names reporting.
Chinese GDP surprised on the upside in Q1, with growth increasing 1.3% over the quarter (4.8% y/y) compared to the 0.7% consensus. Of course, the data largely predate the imposition of more stringent Covid restrictions, with an estimated ~370m people in China are now in full or partial lockdown, amounting to around 40% of the country’s GDP. Economists think China is unlikely to reach its 5.5% GDP growth target for this year, unless it can do what no other country has done – eliminate Omicron before too much economic damage is inflicted. While policymakers have signalled more support for the economy, the response to date has been relatively cautious. The PBOC kept its 1-year interest rate unchanged on Friday, against market expectations for a 10bps rate cut, while reserve ratio requirements for major banks were reduced by just 25bps, the smallest reduction on record. The PBOC has focused on targeted measures, such as providing banks with funding to lend to sectors which have been hard hit by Covid restrictions.
There have been a lot of economic data released over the past few days, as the data column at the top of this note illustrates. The University of Michigan consumer confidence index rebounded from a 10-year low in April, with the sharp increase in stock prices from mid-March likely boosting sentiment. Confidence remains at very subdued levels but this doesn’t appear to have translated through to lower consumer spending as yet. Retail sales were close to expectations in March although upward revisions to prior months imply spending was strong through Q1 (a 13% annualised increase in the control group measure of retail sales). Meanwhile, the Empire manufacturing survey, based on firms in the New York area, was much stronger than expected, with the index hitting its strongest level since the end of last year. In Australia, the unemployment rate stayed at 4% in March (3.954% unrounded), its equal lowest rate since 1974.
Thursday saw a modest increase in NZ short-term rates after their big post-RBNZ falls the previous day. The 2-year swap rate was 2bps higher on the day, finishing the week at 3.50%. The market is pricing a peak in the cash rate of around 3.85%, well down on what it was before the MPR but still well above the RBNZ’s most recent projections (which showed a peak of 3.35%). Rates are likely to open sharply higher to start the week here, reflecting the big moves higher in global rates over the long weekend.
NZ house prices continue to slide, with the REINZ house price index falling 2.1% m/m in March. We expect this trend to continue and we’re pencilling in a 10%-15% decline, with the risk being an even larger price correction. Inflation and employment are front of mind at present, but house prices could start to draw the market’s attention later this year, especially if inflation does start to moderate.
An interview with RBNZ Governor Orr, titled ‘Governor Talk: New Zealand Tackling Inflation during Uncertain Times’ will be released at 8am this morning. The NZ Performance Services Index (PSI) is also released this morning. The index has been stuck below 50 for seven consecutive months, highlighting the challenges the services sector has been facing amidst Covid restrictions and the latest Omicron wave. The key data release for the domestic market this week though is CPI on Thursday. We are looking for headline CPI to increase 2% q/q which would take the annual rate to 7.1%. At the April MPR, the RBNZ said it was expecting headline inflation to peak around 7% in the first half of the year.