The main story over the past 24 hours has been the sharp weakening in the JPY, with USD/JPY blowing through 130 overnight after the BoJ stood firm on its commitment to cap Japanese rates under its Yield Curve Control policy.
The USD has continued its recent strong run, with the DXY index reaching a 20-year high overnight, seeing the NZD fall below 0.65. Equity markets have rebounded strongly overnight, with the S&P500 up by more than 2%, helped by strong earnings from Meta (formerly Facebook). Meanwhile, European rates are much higher after another upside surprise to German inflation and after the Swedish Riksbank raised rates and signalled another two to three hikes later this year. NZ rates had a wild day yesterday, with the 5-year swap rate breaching 4% for the first time since early 2015 before ending the day slightly lower.
There is a lot to cover over what has been a wild and hectic past 24 hours. Starting in Japan, the BoJ bucked the hawkish trend among central banks, doubling down on its Yield Curve Control (YCC) policy at its meeting yesterday. The BoJ said it would now conduct bond buying operations on an ongoing daily basis going forward at a fixed 0.25% yield. Previous YCC interventions had only been ad hoc, when the market was challenging the upper-end of its perceived 0.25% tolerance limit for the 10-year bond rate. The BoJ’s move signals it remains committed to its ultra-easy monetary policy stance, despite the recent weakness in the JPY. Speculation leading into the meeting that the BoJ might either revise its forward guidance or hint at future changes to its YCC policy to allow more upward movement in Japanese rates (to provide some support to the JPY) was wide of the mark. To be fair, the BoJ has been battling deflation for decades so one can understand why it would be extremely cautious about taking steps to pre-emptively tighten monetary policy.
USD/JPY exploded higher after the BoJ meeting and it has extended that move overnight, breaking above the 130 level for the first time in 20 years. USD/JPY is up by a massive 2.1% from this time yesterday and is now trading above 131. Even some stepped-up rhetoric from the Finance Ministry, that recent moves in the JPY warranted “extreme caution” and that it would take appropriate action (i.e. intervene in the FX market) if required, failed to halt the upwards momentum. With the BoJ signalling it stands committed to cap the 10-year Japan bond rate at 0.25%, any further increases in US rates will mechanically widen the interest rate differential, likely putting upward pressure on USD/JPY.
Unlike the BoJ, the Swedish Riksbank has folded into line with the hawkish consensus among central banks. The Riksbank had claimed as recently as February that rate hikes weren’t on the agenda for several years but, in a sharp U-turn overnight, it raised its cash rate from 0% to 0.25%. The move wasn’t a huge surprise to the market, which had been pricing around a 75% chance of a hike, but it caught the economics community off guard. The Riksbank signalled it expects to raise rates another two to three times this year, a similar pace to that expected of the ECB. Sweden’s 2-year swap rate increased 15bps while the SEK has outperformed, up by around 0.2% over the past 24 hours despite broad-based USD strength.
European 10-year rates were much higher overnight, by around 10bps in Germany and 14bps in Italy, with the market seeing some read-across from the Riksbank’s hawkish policy outlook and as German inflation blew past expectations for the second month running. Ahead of tonight’s Euro area-wide figures, German annual CPI inflation hit a fresh multi-decade high of 7.8% (7.6% exp.), despite the government’s recent fuel tax cut. Meanwhile, Spanish annual CPI moderated to 8.3%, from 9.8% the previous month, helped by a fall in electricity prices (from what were all-time highs). More disconcertingly for the ECB, Spanish core inflation continues to increase, hitting an almost 30-year high of 4.4% y/y. ECB Vice President de Guindos said he thought the peak in European inflation was “very close” although the key question is how quickly inflation will moderate and whether it will settle above the ECB’s 2% target.
The increase in European rates has flowed through to the US Treasury market, albeit rates are up by significantly less in the US. The US 10-year rate is around 3bps higher, at 2.86%, as it shows signs of consolidating under the psychologically important 3% level.
Equity markets remain very volatile and choppy. After their sharp falls earlier in the week, equities have rebounded strongly overnight, with the S&P500 up by 2.7% and the NASDAQ increasing by more than 3%. A strong earnings report from Meta (formerly Facebook) provided some relief to the market in what has been a mixed earnings season, with the platform reporting higher user numbers, seeing its share price surge 18%. Tech heavyweights Apple and Amazon report after the bell this morning.
Except for the CAD and SEK, the USD is stronger across the board overnight, continuing its surge higher. In a fresh milestone, the DXY index briefly traded at a 20-year high, just below 104. The strength in the USD overnight has come despite a recovery in risk appetite – which is usually USD negative – and a relatively modest increase in US rates. Indeed, US rates have increased by much less than European rates over the past 24 hours.
In other currencies, the weakness in the JPY has spilled over to the CNY, which has resumed its downward trend. After stabilising over the past few days, USD/CNH has decisively broken above 6.60, rising a chunky 1.1% over the past 24 hours, its biggest one-day move since March 2020. USD/CNH is trading at around 6.66, its highest level in 18 months.
Likewise, the NZD broke below 0.65 yesterday afternoon, setting new lows for the year, while the AUD is now trading below 0.71. With global growth headwinds growing by the day, including those related to China’s lockdowns, and more talk about the risks of a global recession next year, the NZD and AUD have naturally come under downward pressure. NZD/JPY has increased by more than 1%, although it remains below its recent seven-year highs.
In China, Shanghai reported just over 10,000 new cases on Wednesday, its lowest level in five days, while cases continued to hover around the 50 mark in Beijing, with the city’s mass testing not yet revealing a much wider outbreak. Beijing said school holidays would start a day early and the return date would depend on the Covid situation. Children have accounted for around a third of Beijing cases.
As flagged by some economists, US Q1 GDP growth came in negative, at -1.4% annualised, as net trade and inventories detracted from quarterly growth. Importantly though, domestic demand remained strong, with consumption growing at a 2.7% annualised pace in Q1 and investment a very strong 9.2%. there was nothing in the report to change market expectations that the Fed will raise its cash rate by 50bps next month and market reaction was limited.
Natural gas futures in Europe have fallen almost 10% overnight, reversing the previous day’s spike higher after news that Russia had stopped supplying gas to Bulgaria and Poland. Bloomberg reported that Italian energy company Eni was preparing to open ruble accounts, against European Commission warnings, as a precautionary measure.
It was another wild day in the domestic rates market yesterday, with extreme swings in both directions. The day started as the previous session left off, with continuing paying interest and seemingly few receivers in sight. The 2-year swap rate rose as much as 14bps in a liquidity vacuum, hitting a peak of 3.94% at one point, while the 5-year swap rate broke above 4% for the first time since January 2015. The market then shifted momentum in the afternoon, with rates falling almost 20bps from their intraday highs. The volatility remains eyewatering. By the close of trading, swap rates were 2-3bps lower in the 2-to-5-year maturities and 6bps lower at the 10-year point. OCR expectations remain elevated, with the market pricing 144bps over the next three meetings, implying a high chance of 50bps moves at each of them.
Yesterday’s ANZ business survey for April conveyed some familiar themes. While firms’ activity expectations rebounded modestly, profit expectations remained dreadful and, at -30, comparable to the depths of the GFC, as firms battle intense cost pressures. Pricing intentions did ease a little although, with a net 76.7% of businesses saying they intend to raise prices, they remain extremely high and consistent with broad-based inflationary pressures. Meanwhile, the outlook for residential construction was very weak at -36.8, symptomatic of the slowdown in the housing market. The survey highlights the challenging macro picture facing the RBNZ, with growth headwinds mounting but inflation and cost pressures still running much too high for comfort. The ANZ consumer confidence survey is released this morning.
The US employment cost index, seen as one of the more comprehensive measure of labour costs, is released tonight. The consensus is for a 1.1% quarterly increase in the index, which would bring the annual rate to 4.1%. Most economists think wage growth is running above levels consistent with the Fed’s 2% inflation target. The other key data release tonight is European CPI, which is expected to show headline inflation steady at 7.5% y/y while core inflation is expected to move further above the ECB’s 2% target, at 3.2% y/y.
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6 Comments
Bloomberg reported that Italian energy company Eni was preparing to open ruble accounts, against European Commission warnings, as a precautionary measure.
Surely it is worth noting that the Ruble is currently the strongest currency in the world - and how this will drive inflation in Russian gas dependent countries.
The world needs to watch and learn from Europe, how to make your economy vulnerable. This is not the first time the world has been held to ransom by fossil fuels and their suppliers. Time to wean ourselves off them and avoid the wars they generate. Don't hear anything from Merkel these days I bet she's keeping quiet .
It's apparent that despite the OCR rate rises, the NZD is going in the wrong direction right now. Theoretically, a higher rate differential would strengthen the NZD however, this has not occurred. A double whammy would occur if the RBNZ continues to hike to drive a stronger NZD yet its not working and this will mean imported inflation AND lead to higher interest costs on loan borrowings.
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