There has been plenty of central bank-speak since the NZ close and more hawkish commentary out of Europe has seen a front end-led sell-off in global bond markets. European 10-year rates are up 7-10bps, with 2-year rates up near 15bps. The US 10-year rate revisited 2.95% and is currently up 8bps for the day to 2.92%. Weaker risk appetite has seen commodity currencies underperform, with the NZD and AUD down in the order of 0.9% overnight. Selling pressure in JPY looks to have been exhausted, managing to hold its ground despite the big lift in global rates.
A growing chorus of ECB Governing Council members seem to be calling time on the current minus 0.5% deposit rate, moving in a more hawkish direction. As we’ve noted previously, an inflation rate of 7.5% is incompatible with a negative policy rate and it’s just a question of time as to when lift-off begins. Comments from Wunsch and vice-President de Guindos are fresh faces to the more hawkish side of the debate.
Wunsch said that “without any really bad news coming from that [Ukraine] front, hiking by the end of this year to zero or slightly positive territory for me would be a no brainer…what’s priced in by the markets today to me is on the low side of what might be required to get inflation under control”. De Guidos added to the hawkish sentiment, saying that he saw “no reason why we should not discontinue our Asset Purchase Programme in July”, adding that a rate hike as soon as July was possible.
These comments kicked off a sell-off in European rates, led by the short end of the curve, that has spilled over into other markets. Another 15bps of tightening has been priced into the policy rate for this year, leading to a 15bps lift in Germany’s 2-year rate and with European 10-year rates up in the order of 7-10bps. UK rates have followed a similar path, with BoE MPC member Mann suggesting that she is considering whether a larger than 25bps move is needed next month. However, her comments and those of Governor Bailey still conveyed a tone of caution on policy, with Bailey saying that the central bank was walking a very tight line between tackling inflation and the output effects of the real income shock from higher inflation, and the risk that could create a recession. On that basis he was nervous about giving forward guidance.
US Fed Chair Powell and ECB President Lagarde spoke on an IMF panel. Powell said the US economy was “very strong” and that March might prove to be the peak in inflation. A half-point hike was on the table in May (currently fully priced by the market) and that a soft-landing for the economy was the Fed’s goal. Lagarde painted a different picture for the euro area economy, noting that the risks were skewed to the downside for growth, with the European recovery stalled by the war in Ukraine. And while inflation will be more than double the target at year end, inflation must be addressed in a gradual way – ECB policy was about normalisation, not tightening.
The sell-off of European bond markets spilled over into the US Treasuries market, with the curve showing some flattening. The 2 and 5-year rates are up 11bps for the day, the latter temporarily piercing the 3% mark for the first time since 2018. The 10-year rate revisited the 2.95% mark and is currently up 8bps at 2.92%.
The higher rates backdrop has seen US equities trade with a more cautious tone. After a strong open, being up over 1% in early trading, the S&P500 has since steadily fallen and is currently down close to 1%, even with a 5% gain from Telsa after a stronger-than-expected earnings announcement.
In economic data, the Philadelphia Fed index was slightly softer than expected at 17.6. The delivery times component fell sharply from 39.7 to 17.9, the lowest reading in over a year, a possible sign of easing supply-chain issues, although pricing indicators remained very strong. Initial jobless claims last week remained little changed at 184k, continuing to track around a historically low level.
The soft risk appetite backdrop has driven commodity currencies weaker. The NZD and AUD show falls in the order of 0.9% since the NZ close to 0.6730 and 0.7370 respectively, while CAD is 0.7% weaker. More hawkish ECB-speak has supported the euro, although a strong rally to 1.0935 wasn’t sustained, and it is close to flat on the day, back down to 1.0840. Interestingly, against a backdrop of much higher global rates, JPY has range traded centred about 128.30 – speculators are no doubt a little nervous in driving an even weaker yen, given the potential for intervention from the MoF to reverse the trend. While NZD/AUD is flat at 0.9140, other key NZD crosses are all weaker in the order of 0.8-1%.
In domestic news, NZ’s CPI print for Q1 wasn’t as high as feared, not quite piercing the 7% y/y mark, but a 32-year high of 6.9% nonetheless. Core measures also showed inflation gathering momentum in Q1, with Statistics NZ’s quarterly measures ranging from 1.1 to 1.8% q/q (annualising to about 4-6%), still far too high for comfort. The RBNZ’s sectoral factor model estimate of core inflation surged to 4.2% y/y, up from a revised 3.8% in Q4 (previously 3.2%). This measure is usually considered very sticky, barely changing by 0.1-0.2 per quarter. The fact that this series shows (another) large upward revision highlights the strength of the current inflationary impulse, which is giving the series some significant “end-point” problems as the calculation tries to assess the underlying trend.
The bottom line is that there was little comfort from the slight undershoot in the headline rate and there was no net change in OIS pricing on the day, with the market just 3bps shy of pricing in a full 50bps hike next month and a cash rate north of 3.25% by the end of the year. Swaps and most NZGB yields fell 1-2bps for the day, with global forces in play, although the very long end of the NZGB curve felt some upside pressure, given the tender of 30-year bonds overhanging the market, with 20-30-year yields lifting 2-3bps on the day.
The calendar over the next 24 hours is full, including Japan CPI, retail sales for the UK and Canada and a range of PMIs for April across Europe and the US, which are widely expected to show some slippage in economic momentum compared to March.