Surprise 50bps hike by the Swiss National Bank. US economic dataflow much weaker than expected. USD tumbles as recession fears trump safe-haven bid, amid chunky falls in equity markets

There have been some chunky moves in financial markets, in the aftermath of the super-sized 75bps hike by the Fed yesterday, followed up by a 25bps hike by the BoE and a surprise 50bps hike by the Swiss National Bank. US and European equities are significantly weaker, global rates are mostly higher, while the USD has taken a big tumble despite the risk-off backdrop. CHF, GBP and JPY lead overnight gains, while the NZD is up about 1½% to just under 0.64.

The lift in US equities after the Fed hiked by 75bps yesterday looked odd in the face of the central bank’s determination to bring inflation back down to 2%.  Recession risk calls have got even louder and with a likely to hit earnings, US equities have tumbled in the order of 3½% so far today, extending the bear market moves of late. European markets were down in the order of 2½-3% in the face of rate hikes by the Bank of England and the Swiss National Bank, the latter coming as a surprise.

The Bank of England voted 6-3 to raise its policy rate by 25bps to 1.25%, deciding to opt for the baby step rather than a larger 50bps or 75bps move seen elsewhere recently, with the three MPC members in the minority voting for a 50bps hike. While a full set of forecasts weren’t provided, the Bank noted it now expected CPI inflation to rise slightly above 11% in October, following another boost to household energy prices. On forward guidance the Bank has left itself with plenty of wriggle room with “the scale, pace and timing” of any further rate hikes being data dependent but “the committee will be particularly alert to indications of more persistent inflationary pressures, and will if necessary act forcefully in response”.

The market interpreted the final comment as the Bank signalling possibly larger rate hike increments in the near term and moved to fully price in a 50bps hike at the next meeting, with a chance of a 75bps move and some 175bps of hikes to 3% now priced over the last four meetings of the year. GBP initially dipped to full cent to 1.2050 after the baby 25bps hike hit the headlines but then soared to 1.24 after the market had time to digest the detail.  GBP currently sits at 1.2355, up 1.7% from the NZ close.

Earlier, there was an even bigger reaction for CHF, after the Swiss National Bank unexpectedly raised its policy rate by 50bps to minus 0.25%, to counter increased inflationary pressure. Only one economist had picked any rate rise at all and that expectation being a 25bps hike. The statement noted that “it cannot be ruled out that further increases in the SNB policy rate will be necessary in the foreseeable future” and “the SNB is also willing to be active in the foreign exchange market as necessary”, dropping its previous wording on a highly valued franc. CHF has increased over 3% since the NZ close, taking USD/CHF down to 0.9640.

US economic data released overnight were uniformly worse than expectations.  Housing starts and permits fell in May by much more than expected, down 14.4% m/m and 7.0% respectively.  Mortgage applications have been plunging this year against a backdrop of rising mortgage rates and the fact that they have hit 5.78%, the highest level since 2008 as headlined by the WSJ, should ensure more weakness in the housing market to come. The Philly Fed business outlook indicator fell to minus 3.3 against expectations of a small lift, and initial jobless claims held up around 229k, against expectations of a decline to 217k. While seasonal factors may be a factor in the recent lift in initial jobless claims, there has also been overwhelming anecdotes of rising staff layouts.

Bond market moves seem sedate compared to some meaty moves in equities and currencies. The US curve has steepened, with some paring back of Fed hikes dragging the 2-year rate down 5bps, to 3.14% while the 10-year rate is currently up 2bps to 3.31%.  The UK 2-year rate is up 15bps as the market interpreted the BoE comment in a hawkish light, while its 10-year rate is up only 5bps. Germany’s 10-year rate is up 7bps, while notably peripheral bond spreads have narrowed, with Italy’s 10year rate down 7bps, the market liking the ECB’s move to limit fragmentation risks in the euro area.  Bloomberg reports that ECB President Lagarde has told EU finance ministers that the new anti-crisis tool currently under development will kick in if borrowing costs for weaker nations rise too far or fast.

In currencies, we’ve noted GBP and CHF strength but the broadly based fall in the USD is also notable.  We’d interpret the moves as recession fears in the US dominating the usual safe-haven bid, and the massive USD over-valuation on longer term valuation or PPP considerations also being forefront of mind.  Are we at the beginning of the long-anticipated USD downward correction? We can’t be sure of course, but a chunky 1.4% fall in DXY and a 0.8% fall in the broader BBDXY USD index is a start.

JPY has caught a safe-haven bid, with USD/JPY tumbling to 132, but that might also reflect some last-minute positioning of the BoJ today, see below. EUR has been mid-pack with a 1.2% gain overnight to 1.0570, the market seemingly unconcerned about reduced gas supplies.  The WSJ reports that Russia has throttled deliveries of gas via the Nord Stream pipeline to Germany this week, blaming missing turbine parts due to sanctions. EU officials deny that claim and say Moscow is weaponizing gas supplies. Our central view of euro area growth, inflation and EUR risks has factored in this threat to gas supplies, with Russia seen getting more economic and political bang per buck later in the year ahead of the Northern Hemisphere winter.

Despite the risk-off backdrop, the NZD and AUD have made solid gains, while CAD has been weak, being more tied to the US economy and USD fortunes. The NZD has charged higher since the US market open, trading just shy of the 0.64 mark, currently up about 1½% overnight to 0.6380. The outperformance against the AUD in the overnight move defies the economic backdrop, as seen in yesterday’s data (more on that below), suggesting some positioning adjustments or flows have been at play. The AUD is up “only” 0.6% to 0.7060, seeing NZD/AUD recover to 0.9040.

NZ GDP data confirmed that the economy was weak in Q1, with a 0.2% q/q contraction, not helped by Omicron-related restrictions. We have been warning not to read too much into this, given the likelihood of a decent bounce-back in Q2 as most restrictions eased. We still think that recession risk for the NZ economy remains very high, against the backdrop of slower global growth, surging interest rates and a tumbling housing market, but that’s more a story for later this year or early next year.

The weak result wasn’t a surprise to most of the local big trading banks like ourselves, but the consensus and RBNZ were picking a 0.6-0.7% increase. The shortfall in growth supported a fall NZ rates on the view that the weaker economy takes the heat off the RBNZ to deliver super-sized rate increases of 75bps like the Fed.  However, the fall in rates was reversed after the strong Australian employment report.

Australian employment surged over 60k in May, much stronger than expected, with higher labour force participation behind the unemployment rate remaining flat at its multi-decade low of 3.9%. The data reinforced market expectations of the RBA moving in at least 50bps clips over coming meetings.

Overall, it was a wild day for the domestic rates market, opening to the downside in the immediate aftermath of the post-Fed moves, with weaker GDP nudging rates down further before the Australian data saw a reversal of course. The net change in the 2-year swap rate was a 7bps fall to 4.49%, while 10-year swap fell only 2bps to 4.55%, having been marked down to as low as 4.35% intraday. The NZGB 10-year rate marked out a range of 4.13% to 4.30% throughout the day, closing down 2bps at 4.29%.

In the day ahead, NZ’s manufacturing PMI is released but the key focus will be on the BoJ’s policy update this afternoon. There is more interest than usual in this meeting, given the recent dislocation of the JGB market and the BoJ needing to ramp up purchases to contain the 10-year rate no higher than 0.25%. At the same time, rhetoric on concern about the weakening yen has stepped up. The BoJ can’t expect the yen to stabilise when it is printing money at such a rapid rate, the two are incongruous. The BoJ will need to abandon its current YCC policy at some stage and the market will continue to test the Bank’s resolve on defending the rate target as long as this no-longer-fit-for-purpose policy continues.