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OECD cuts global growth forecasts. Higher oil prices add to inflation worries. Equities retreat. USD/JPY blasts through 134. Global rates higher; US 10s above 3%

Currencies / analysis
OECD cuts global growth forecasts. Higher oil prices add to inflation worries. Equities retreat. USD/JPY blasts through 134. Global rates higher; US 10s above 3%

A generally gloomy mood in markets overnight, with little new news but ongoing concerns around high inflation and slowing growth. Oil prices have pushed higher as have global rates, driven by the long end. Equites are generally lower. In currencies, the US dollar is marginally stronger while USD/JPY has continued its surge higher. There wasn’t a whole of news out overnight, with markets focused on tonight’s ECB meeting and Friday’s US CPI.

Oil prices pushed higher, with Brent crude up around 3% and pushing through US$124/bbl to test its highs since the initial spike post invasion of Ukraine. The rally was kicked off overnight after the UAE Energy Minister suggested that prices are far from peaking because Chinese demand hasn’t fully returned from the impact of the pandemic and ongoing under-investment in the industry. The minister also said that the UAE was in talks with Germany and other nations to export more gas, which offered some fleeting support to the EUR as the region looks to ways to wean itself off Russian energy. The EUR approached 1.075 before easing back. NZD/EUR has drifted lower toward 0.6000.

Oil prices were further supported after EIA data showed crude inventories at the US’s biggest storage hub at Cushing fell 1.59m barrels last week. And comments from the OPEC Secretary General, Mohammad Barkindo, who noted that ‘with the exception of 2-3 members, all are maxed out’ on oil production and ‘The world needs to come to terms with this brutal fact’ only added to the bid tone.

The OECD sliced its outlook for global growth this year to 3.0% from the 4.5% it predicted in December and doubled its inflation projection to nearly 9%. No region was spared, with lower growth forecast for all major economic areas. The OCED sees even slower growth in 2023, with the world economy seen slowing to 2.8%. This follows a similarly downbeat assessment from the World Bank over recent days. While a slowing world economy is hardly new news, it OCED forecasts did nothing to alter the gloomy mood. Notably while the OECD said it’s warranted for monetary authorities to pare back stimulus, it urged caution particularly in the euro area, where surging prices mainly reflect supply pressures. It suggested central banks will have to conduct a ‘delicate balancing act’. Food for thought heading into tonight’s ECB meeting.

Global rates have pushed higher, driven by the long end. Core European 10 year rates are up in the order of 6-7bps, while Italy’s bond outperformance yesterday was reversed with its 10 year rate up nearly 9bps. Greek bonds were the clear underperformer on the day with 10 year yields up more than 15bps. In the US, 10 year rates oscillated around 3% albeit with an upward drift, which was added to following a softer 10 year auction. US 10 year rates currently sit near 3.03%, up over 5bps on the day.

In equities, there was some initial optimism flowing through from Asia’s session yesterday after new video game approvals encouraged the view that China is loosening a crackdown on tech firms. The Shanghai 300 index closed up 1% yesterday. But the mood soon turned, as focused returned to high inflation, higher rates, and slower global growth outlook. The Euro Stoxx 50 index fell 0.5%, while the S&P500 is currently down around 1%, with energy being one of the few sectors not in the red.

Currency moves were generally sedate, with the main exception being USD/JPY which continued its surge higher.

Late yesterday, BoJ Governor reiterated that the bank must continue with the current monetary easing to support economic activity aimed at achieving 2% inflation in a stable and sustainable manner. While he went on to suggest that ‘unless [the] Fed raises interest rates faster than their forward guidance shows, dollar rate may not be so much affected by US-Japan interest rate differentials’, the market had other ideas. USD/JPY continued its surge higher, up more than 1% on the night, roaring through 134 to a fresh 20 year high. Recall the pair started the year around the 115 mark.

GBP is a touch softer with the OCED warning of stagnation in 2023. GBP sits 0.4% lower at around 1.2540.

NZD traded a tight range overnight and opens around 0.6450 this morning, not far from where we left it last night. A softer JPY sees NZD/JPY up at 86.5, eyeing April’s high of just over 87.

NZD/AUD has moved sideways but continues to lurk near its post RBA-hike lows around the 0.8960 mark. If it cracks that, it would bring the 2017 low of circa 0.8877 into sight.

Yesterday saw NZ Fin Min Robertson discuss the recent Budget at select committee and the release of the Crown accounts for the 10 months to April. Over that period, tax revenue was running $1.793b ahead of plan and core crown expenses were $0.768b under, generating a smaller operating deficit than Budget plan. But core Crown residual cash was running a $1b bigger deficit than planned and (the new measure of) net debt was some 1.3% of GDP higher than projected, with the latter including revaluations.

All up, nothing to materially disturb markets although NZGB yields did rise later in the day reversing some of the previous days moves. It all looks more like a function of thin markets than anything else. NZGB yields rose across the curve with a general 4-6.5 bp lift and a mild flattening bias. Bonds cheapened relative to swaps, with some influence from the previous day’s post-close RBA 50 bp rate hike. NZ 2-year swaps closed up around 4.5bps, at 3.95%, while 10-year was up about 1bp to nearly 4.08%.

In light of the RBA 50bp hike and newly revealed preference to quickly normalise policy – along with expected high inflation prints in Q2 and Q3 – NAB has revised up its cash rate profile. NAB expects additional 50bp hikes in July and August to take the cash rate to 1.85%, with a further 25bp November rise to 2.10% by year end. NAB sees the pace of hikes slowing in 2023, with two 25bp increases, taking the cash rate to 2.60%.

In the day ahead, Chinese trade data is the key economic release, but the headline act will be the ECB’s latest policy update. The Governing Council will see an updated set of forecasts from its staff, which will see inflation tracking much higher than expected just a few months ago. Despite this new information it is remarkable that GC members have continued to guide that rate hikes won’t be considered until next month. The key decision at tonight’s meeting will seemingly be when to stop QE, either immediately, or at the end of the month. There has also been chatter about some backstop measures to prevent peripheral bond yields skyrocketing once QE is stopped. The market will be most interested in how President Lagarde handles the press conference and how much is given away in terms of the debate on whether to hike next month by 25bps or 50bps. So far she has made it clear that she favours a gradual approach, against a cohort of hawkish members who argue for a speedier normalisation of policy.

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