After a positive start to the week, risk sentiment is weaker again on the back of concerns about the earnings and growth outlook. This sees weaker global equities and global rates lower. Currency movements reflect the dataflow and sentiment, with GBP dragged down on a very weak PMI reading. EUR has been supported by some hawkish commentary from a couple of ECB GC members. The USD has been pulled in opposing directions, leaving the NZD around 0.6450.
The lift in risk appetite seen yesterday, for reasons not obvious to us, has given way to a reversal one day later with some obvious triggers. A shocking earnings update from Snap after yesterday’s market close saw S&P futures steadily fall as it caused a reassessment of the prospects of other social media companies in the face of a weaker advertising backdrop, while some weak economic data have added to the gloom.
PMI data released overnight were mixed. Euro area PMI data fell in May by a little more than expected, but at 56.3 the services index remained at a level consistent with reasonable growth, with pent-up demand after the end of lockdown restrictions seen to be offsetting the impact of the war in Ukraine – the index certainly not at a level consistent with economic recession, but the risk remains weighed to the downside over coming months. Manufacturing was relatively weaker at 54.4, dragged lower by global factors such as supply chain issues.
The UK services PMI was a shocker, plunging over 7 points to 51.8 and plays to the view that the economy is heading perilously close to economic recession, a reflection of the mountain of negative forces – war on its doorstep and other global forces, trade frictions caused by Brexit and the cost-of-living crisis that will see inflation top 10% later this year.
The US services PMI was also notably weaker than expected, falling over 2 points to 53.5. But of more shock to the market was a plunge in new home sales, down 16.6% in April alongside downward revisions. Surging mortgage rates and plunging mortgage applications have been forewarning a much weaker backdrop for the US housing market but the consensus was expecting a milder fall in sales.
The market is back to worrying about the growth outlook, with the S&P500 down as much as 2½% at its low this morning before paring losses and down about 1½% as we go to print, with the tech-heavy Nasdaq index down 3%. US monetary policy expectations have been pared back, with the 2-year Treasury rate down 14bps to 2.48% and the 10-year rate is down 10bps to 2.75%, trading as low as 2.72% overnight.
Another two 50bps hikes by the Fed in June and July, as signalled by Chair Powell, remain fully priced but there is more uncertainty about the path beyond that. Atlantic Fed President Bostic, not a voter on FOMC this year, penned an essay which conveyed a cautious tone about the policy outlook, noting that “we have seen throughout the pandemic that events and market shifts can happen quickly”. He noted the number of uncertainties and so policymakers must “proceed carefully in tightening policy”. Bostic has previously argued for a possible pause in policy at the third meeting ahead in September to assess the impact of tighter policy on the real economy. This view could gain some traction over coming months if the economic data continue to deteriorate, and inflation data are on a clear downward trajectory.
On ECB policy, one day after President Lagarde signalled she was comfortable with two 25bps hikes in July and September, two of her colleagues have argued for a July hike of 50bps. Austrian Governor Holzmann said that a 50bps hike in July would be appropriate as it signals the Bank has understood the need to act and anything else risks being seen as soft. This was soon followed by Governor Kazaks who said that the Bank should not rule out a 50bps hike. Earlier in the day, the French Governor Villeroy de Galhau said that a 50bps rate hike isn’t yet consensus at the Bank.
Overall, the more hawkish tone evident within the ECB Governing Council has seen a smaller fall in European rates compared to the US, with 2-year rates in Germany and France down only 4bps. Meanwhile the shocking UK PMI data has seen the market pare back BoE rate hikes, with the UK 2-year rate down 11bps.
These rate gyrations have been reflected in currency movements. Following the PMI data, GBP plunged to a low of 1.2472 before regaining some poise and is currently back above 1.25. Expectations of a more hawkish ECB against a less hawkish Fed saw the EUR recover to a peak just under 1.0750 earlier this morning, its highest level in four weeks. Against a falling global rate backdrop and risk-off sentiment, JPY has been the strongest performer, with USD/JPY falling below 127.
Despite weaker risk sentiment, the worries about US growth and the paring of rate hike expectations means that the commodity currencies haven’t performed too badly. The NZD showed some weakness during local trading hours as S&P futures were falling, but has stabilised overnight and currently sits around 0.6450. The AUD has spent much of the night hovering just under 0.71.
On the crosses, NZD/AUD is flat around 0.91, NZD/EUR took a peek below 0.60, NZD/JPY is down over 1% to below 82 and NZD/GBP has pushed up to 0.5150.
The NZ rates market showed some mild falls across much of the curve, with NZGB yields down 2-3bps. The 2-year swap rate fell 3bps to 3.55%, while the 10-year rate was flat at 3.68%. NZ retail sales data for Q1 were softer than expected but have been very noisy recently, driven by the on and off lockdown restrictions. The data support our view that the economy started the year on a weak note, with flat GDP and some chance that the economy contracted in Q1. Since the NZ close the Australian 10-year bond future is down about 6bps in yield, which will set the tone when the NZ market opens this morning.
The focus turns to the RBNZ MPS this afternoon. The Bank is widely anticipated to lift the cash rate by another 50bps, taking it to 2%, near the Bank’s estimate of “neutral” policy. The two consecutive 50bps hikes follows the Bank’s least regrets policy in getting the OCR quickly to a neutral level, and doesn’t necessarily imply a higher peak in rates, although the terminal rate might get nudged up a little to 3.5%.
With neutral policy reached, we expect the Bank to subsequently become more data dependent and it will want to keep its options open about the magnitude and rate of change of policy tightening from here. Thus, we see the tone as similar to that of the “dovish hike” in April. As for any possible NZD reaction, our usual missive is to fade any near-term reaction, as RBNZ policy is not a key driver of the path forward for the NZD. The Bank’s decision will be long forgotten by Thursday and we’ll be back monitoring the copious global risks that continue to overhang the economy and NZD outlook.
Elsewhere, US durable goods orders data are released tonight and the FOMC minutes of the early-May meeting are released, but given the plethora of Fed-speak since the meeting it is hard to imagine them revealing anything new.