Global long-term rates hit fresh highs. US nonfarm payrolls close to expectations, but some tentative signs that wage pressures are easing. Industrial metals and commodity currencies also lower as global growth concerns weigh

US and German 10-year rates surged to fresh cycle highs on Friday amidst continued hawkish rhetoric from the Fed and ECB.  The nonfarm payrolls report suggested the pace of US wage growth may be easing although this is highly unlikely to prevent another 50bps Fed rate hike next month.  Meanwhile, equities, base metals and commodity currencies remain under downward pressure on growing concerns around the global growth outlook, the NZD ending the week just above the 0.64 mark.  Russia marks Victory Day tonight amidst speculation Putin could use the occasion to formally declare war on Ukraine.

The monthly nonfarm payrolls report showed the US recorded a 428k increase in jobs in April, a touch higher than market expectations of 380k, although prior months were revised down by 39k.  The three-month moving average of monthly payroll gains is a still very healthy 523k but appears to be trending down as the available pool of labour gets smaller.  The unemployment rate held steady at 3.6%, against market expectations that it would fall it its pre-Covid lows of 3.5%.  A broad range of indicators suggest the US labour market is extremely tight.

Probably the most interesting feature of the report was the slight downside surprise in average hourly earnings, which grew 0.3% on the month (0.4% expected).  The three-month moving average of average hourly earnings growth is now at 3.7% (annualised), a marked slowdown from the 6%+ pace recorded late last year.  The recent slowdown in average hourly earnings provides some tentative hopes that wage growth might be starting to moderate, although given the extremely tight labour market and rising inflation expectations, its too soon to say this trend will continue.  In further encouraging news for those – including the Fed – hoping for some inflation relief, the Manheim used car index fell 1% in April.

Despite some tentative signs of moderation in wage pressures, the payrolls report is highly unlikely to get in the way of another 50bps rate hike next month and probably another one in July.  The market is pricing almost 200bps of rate hikes over the Fed’s five remaining meetings this year.  Shorter-term US rates were up only modestly on Friday, with the 2-year rate rising 3bps to 2.73%.

Yield curves remain under steepening pressure, with longer-term rates continue to blast higher around the world.  The US 10-year rate closed at a fresh cycle of 3.13% and it is now within striking distance of the 2018 peak of 3.26%.  Importantly, it is real yields which have been the driver behind the huge move higher in US rates, the 10-year TIPS yield now up to 0.26% (it was below -1% as recently as March).  It is movements in real yields, rather than nominal yields, which are thought to have greater effect on economic activity and risk assets.

In an essay on Friday, Minneapolis Fed President Kashkari, previously the most dovish member of the committee, said the Fed might have to take rates above neutral, seen as around 2.5%, citing the lockdowns in China and Ukraine war as factors that could keep supply chains disrupted and price pressures elevated.  Those views were shared by former Fed Vice Chair Clarida, one of the architects behind the Fed’s ill-fated ‘average inflation targeting’ regime, who said the cash rate will need to get to at least 3.5% to dampen inflation.  After Powell last week appeared to pour cold water on the idea of a 75bps hike, Richmond Fed President Barkin said he would not rule anything out, although he considered the current 50bps hike pace “pretty accelerated ” as it is.  There are plenty of Fed speakers out this week.

ECB rhetoric continues to grow more hawkish by the day as well.  Influential ECB Governing Council member Villeroy said on Friday that “it was not obvious” the ECB should continue buying bonds beyond June and it would be “reasonable” to take the deposit rate, currently -0.5%, back above 0% by the end of the year.  His comments follow those of Chief Economist Lane, seen as one of the most dovish members of the committee, who said the previous night “it is clear” the ECB would hike rates “in a sequence” . The German 10-year rate increased 9bps on Friday, to 1.13%, its highest level since 2014.  The market, emboldened by the ECB’s shift in stance, now expects the first hike in July and another 3.5 hikes by year end.  The hawkish ECB comments helped the EUR stabilise at the end of the week, ending at around 1.0550.

The DXY touched a fresh 20-year high on Friday, continuing its recent strong run, although it ended only marginally higher by the close of trading.  The USD has powered higher over recent months amidst building concerns around the global growth outlook, expectations of aggressive Fed tightening and growing risk aversion.

Oil prices were higher on Friday, gaining around 1.5%, with the market concerned about tight supply and the EU’s proposed ban on Russian oil imports.  However, Bloomberg reported over the weekend that Hungary continues to block the EU’s proposed Russian oil ban, even though it would be afforded a longer transition.  In contrast, industrial metals prices were all weaker, suggesting investors see the demand outlook softening.  Copper was 0.8% lower on Friday and 3.6% lower on the week while zinc and aluminium were 8.2% and 6.1% lower respectively last week.  The lockdowns in China and a dimming global growth outlook are major headwinds for the industrial metals complex.

Against that backdrop, commodity currencies remain firmly in a downdraft, the NZD and CAD off by 0.3% on Friday and the AUD 0.5% lower.  The NZD took several peeks below 0.64 on Friday night before closing the week around 0.6410.  Our revised currency forecasts now have the NZD falling to 0.62 in Q3, as a central view, consistent with a chance of a peek below 0.60 at some point.

Equity markets ended the week on a soft note, the S&P500 falling 0.6% and the NASDAQ 1.4%, the latter closing at its lowest level in 18 months.  Cyclical sectors, including consumer discretionary, continue to underperform amidst growing headwinds for global growth.  The energy sector (+2.9% on Friday) remains only of the few bright spots for the equity market but given its modest 4% weighting, it hasn’t had much bearing on the direction of the S&P500.

In the domestic rates market, the yield curve saw further steepening on Friday, with the 2-year swap rate unchanged on the day and the 10-year rate increasing 5bps, to 4.10%.  The recent steepening trend is likely to continue today given the moves in offshore curves after the NZ market close.  The 2y10y swap curve is around 20bps, having traded as low as 3bps early last month.

There is no major economic data on the agenda tonight although Russia celebrates Victory Day tonight, commemorating the end of WWII, and there has been speculation Putin could use the occasion to formally declare war on Ukraine, allowing him to call up reservists and boost front-line forces.  Such a move would signal that Russia is preparing for a drawn-out conflict.  It is a quitter week in terms of economic data, with the highlight being US CPI on Wednesday night.  Headline inflation is expected to fall back to ‘just’ 8.1% y/y, from 8.5% previously, while core inflation is expected to remain elevated, at 6% y/y.  There are a host of Fed officials speaking, including New York Fed President Williams.

Domestically, the highlight is probably the release of the RBNZ’s inflation expectations survey on Thursday.  The survey is likely to show a further lift in inflation expectations, more so over the 1-year and 2-year horizons given these are highly correlated to contemporaneous headline inflation.  Alas, given inflation expectations are the key risk identified by the RBNZ, the survey only had 33 respondents last time, meaning its representativeness is questionable.  Also on Thursday, Finance Minister Robertson is giving his pre-Budget address.  Last week he said the government was expected to return to fiscal surplus a year later than previously stated, potentially implying some fiscal stimulus is in the wings.