Risk sentiment recovers on positive US economic data and easing of Shanghai restrictions. Global rates up across the board, with come chunky gains across Europe

Risk appetite has recovered as investors eye up easing lockdown restriction in China and some stronger economic data have supported the positive mood. Central bank speak has remained hawkish, but not enough to prevent equity markets from rallying. Global rates are much higher and European currencies have been the best performing.

Risk appetite improved during Asian trading yesterday after Shanghai recorded its third successive day with zero community transmission of COVID19, the required milestone needed to ease the strict lockdown restrictions that have been in place for over a month. Some other regions also show reduced case numbers, but it hasn’t been all good news as new outbreaks are also occurring like in Tianjin and Guang’an, while another district in Beijing has gone into lockdown after a new cluster of infections was found.

In other COVID19-related news, New York City raised its alert level from medium to high amid increasing pressure on the health care system. The guidance now is that face masks are worn in all indoor settings and crowded outdoor settings.

Risk appetite was further supported by a number of positive economic reports across the US, Europe and UK.  US retail sales rose 0.9% m/m in April, close to expectations but the data were much stronger than expected after accounting for a decent upward revision to March data, now showing a 1.4% gain (previous 0.5%). A strong end to Q1 and good beginning to Q2 means that the current quarter is set for a decent rebound even if sales growth over the remain months of the quarter is flat.

The data suggest that near-term recession risks aren’t a threat, but they don’t change the risk of recession next year. Analysts noted that higher inflation flatters the figures somewhat and consumers are drawing on savings to fund the spending binge. An earnings report from Walmart flagged pressure being felt by consumers from higher inflationary pressure, seeing shift in spending away from general merchandise and its profit outlook was cut on higher supply chain and labour costs.

US industrial production also came in much stronger than expected, rising 1.1% m/m in April. Higher US mortgage rates have finally had a significant impact on homebuilders sentiment, with the NAHB housing market index showing a chunky 8 points fall to 69, well below market expectations.

In other economic news, UK employment data were stronger than expected in March, helping drive the unemployment rate down to 3.7%, its lowest rate since 1974, while job vacancies have risen to a record level. Euro area Q1 GDP was revised higher to 0.3% q/q.

Fed speakers have been out in force overnight, with six of them offering their views. Chair Powell repeated his hawkish missive that the underlying strength of the US economy was really good right now, inflation was “way too high” and the central bank was focused on bringing inflation back down to 2%. He repeated that if the economy performs as expected then 50bps hikes are on the table and the Fed won’t hesitate to raise rates above neutral if needed.

The ECB’s Knot, The Netherlands’ representative on the Governing Council, backed a 25bps increase in the policy rate in July and became the first GC member to suggest that a 50bps hike could be possible if inflation risks worsened. These comments drive euro area rates and EUR higher. Just over 100bps of hikes this year are now priced for the ECB policy rate.

Overall, positive risk sentiment drove the Euro Stoxx 600 index up 1.2% while the S&P500 is currently up over 1%.  Global rates are universally higher with 10-year rates up in the order of 11bps across the euro area, up 15bps in the UK and 8bps in the US. The US 10-year rate has traded as high as 2.98%. Some curve flattening has been evident, with the 2-year rate up a chunky 13bps to 2.70%.

In currency markets, European currencies have been the strongest performers. GBP is up 1.3% from this time yesterday to 1.2475, with most of the gain coming after the strong labour market data. EUR went along for the ride and got an added boost after Knot’s hawkish comments, and it currently trades at 1.0540. 

The NZD caught the risk sentiment tailwind, driving up to about 0.6375, before falling back to 0.6350, modestly higher than the NZ close. The AUD saw resistance up at 0.7040 and has fallen back towards 0.70. Despite the higher rates backdrop, there hasn’t been much appetite to take the yen a lot lower and USD/JPY has been hovering around 129.30. On the crosses, NZD is weaker against EUR and GBP, flat against AUD and stronger against the yen, compared to this time yesterday.

The overnight GDT dairy auction showed a 2.9% fall in prices, in line with expectations, continuing the run of falling prices, making it five auctions in a row that has taken the index down a cumulative 16%. In the latest auction whole milk powder was the key driver of the fall, down 4.9%. Fonterra recently noted that China’s lockdowns, the crisis in Sri Lanka and the Russia-Ukraine conflict as having a short-term impact on demand.

Global forces meant that the pressure on the domestic rates market was towards the upside, reversing some of the recent falls. The 2-year swap rate rose 7bps to 3.59% while the 10-year rate rose 4bps to 3.84%.  NZGB rates were up 5-6bps across much of the curve, with 8-9bps increases at the very long end.

In the day ahead, Australian wage data will be closely watched, with a stronger than expected gain upping the odds of the RBA delivering a larger 40-50bps increase in the cash rate next month. Japan GDP likely contracted in Q1 while annual UK CPI inflation is expected to crack the 9% mark, driven by higher household energy costs. Elsewhere, US housing permits and starts and Canada CPI inflation data are released.