Markets are in a risk-off mood, with lower global equities and safe-haven currencies outperforming. Commodity currencies have been whacked overnight, seeing the NZD fall below 0.64. The euro is weaker despite the ECB tilting in a more hawkish direction and providing some clear guidance on future rate hikes. European yields are much higher, while US Treasuries have been in a holding pattern ahead of CPI data tonight. NZ’s 10-year government bond yield rose to a fresh 7-year high after the RBNZ outlined more detail on its LSAP sales.
The headline act overnight was the ECB’s latest policy update. The central bank offered clear policy guidance, with an end to QE on 1 July, a 25bps lift in its policy rate at its next meeting in July and keeping its options open for either a 25bps or 50bps lift in the policy rate in September. The message seemed to be that 50bps was more likely unless the medium-term inflation picture improved. After then, the ECB expects a series of further gradual (25bps) rate increases. To counteract any possible sell-off in peripheral bond yields, “PEPP reinvestments can be adjusted flexibly across time” as well as resuming the PEPP if necessary.
The ECB significantly downgraded the growth outlook for the euro area and upgraded the inflation outlook – core inflation seen tracking above the 2% mark right through to the end of 2024 (running at 3.3%, 2.8% and 2.3% respectively over the next three years, upgraded by 0.7%, 1.0% and 0.4%).
The net market reaction in the rates market suggests that the policy guidance was more hawkish than expected, with the market building in a more aggressive tightening path. Germany’s 2-year rate rose 14bps on the day to 0.81%, while the 10-year rate rose 7bps to 1.42%. Peripheral bond spreads to Germany rose significantly, with Italian 2 and 10-year rates both up about 22-23bps, continuing the trend rise in spread in anticipation of the end of QE.
After an initial lift in EUR, the euro has come under selling pressure. After trading above 1.0770, the EUR fell to as low as 1.0620, suggesting that the more hawkish policy tilt has done no favours to the currency. The stagflation feel to the economic outlook isn’t exactly euro-positive and the ECB still looks hopelessly behind the curve, doing the bare minimum on monetary policy against the backdrop of surging inflationary pressure. The rates guidance delivered leaves the real policy rate even lower since the ECB’s March forecast, given the ramp up in inflation expectations.
US jobless claims rose by a higher-than-expected 229k last week. The holiday week and seasonal factors mean that not too much should be read into the figure, but the anecdotal evidence of a ramp-up layoffs in various sectors of the economy is consistent with recent rise in trend in jobless claims. Focus remains on the US CPI report tonight, which has meant the US 10-year rate has range traded and is barely higher despite the backdrop of much higher European yields, up less than 2bps on the day to 3.04%.
CNH has been volatile on market speculation of a potential revival of Ant Group’s initial public offering, which would be another sign of the government dialling back a crackdown on China’s tech industry. However, the regulator issued a statement saying that it wasn’t conducting work on reviving the Ant IPO. We were more interested in the reports of Shanghai reinstating lockdowns in some areas after new cases of COVID19 in the community popped up, which has seen oil trade off its highs and seen some notable weakness in the commodity currencies.
Against this backdrop and in the context of weaker risk appetite, the NZD showed a steady fall to around 0.64, piercing below that level over recent hours. The AUD showed the same trend and has managed to keep its head above 0.71. NZD/AUD has been crawling its way back up towards 0.90, after finding some support at 0.8950. NZD/EUR dipped to as low at 0.5975 in the aftermath of the ECB announcement but has since recovered to trade flat on the day at 0.6015. JPY and GBP show little movement against the USD, so the NZD is weaker on those crosses.
US equities opened on a weak note and remaining that way, with the S&P500 currently down about 1%. The lead article in the WSJ is gasoline prices near a record $5 a gallon, which is “rippling through” the economy and with prices expected to lift further. The ECB’s hawkish turn did no favours to European equities, with the Euro Stoxx 600 index closing down 1.4%.
The RBNZ published details of its previously announced plan to sell bonds bought under the large-scale asset purchase (LSAP) programme. LSAP sales will commence in July at $5bn per fiscal year, beginning with the longest maturities and working sequentially. The RBNZ is not selling in the secondary market, so there are no market implications. The Budget accounted for the increased debt issuance to reflect the LSAP sales. LSAP sales can be simply viewed as an accounting transaction between the RBNZ and NZDM with the taxpayer effectively footing the bill for the significant mark to market losses – the crown indemnity for the LSAP Programme sits at $8.4b at last count and rising by the month in the rising rate environment.
Even though the RBNZ’s LSAP sales plan contained little news, the NZGB market traded with a heavy tone, and this showed in the tender with poor cover for the 10-year bond. It closed the day up 6bps to 3.88%, its highest level in 7-years. Both the swaps and NZGB curves showed a steepening bias, with smaller increases at the short end of the curves. The 2-year swap rate rose 2bps to 3.97% while the 10-year rate was up 4bps to 4.11%.
In the day ahead, NZ data on wholesale, manufacturing and the services sectors will help us firm up our Q1 GDP estimate which currently sits at flat for the quarter. Timelier data will be published on electronic card transactions for May and, when added to the strong April result, sets the scene for an Omicron-related bounce-back in Q2 spending.
The headline act though will be US CPI data tonight, expected to show inflation still running far too high for comfort, with the core rate expected at 0.5% m/m for the month. Given market sensitivity to inflation, a surprise in either direction could result in a significant reaction.
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