Modest changes in US equities and USTs on Friday, but caps off a wild week in markets. Oil prices tumble 5-7%, commodities market generally weaker in the face of rising global recession risk. AUD under pressure

On Friday, net changes in equities and rates were modest by recent standards, but this capped off a wild week in markets that saw US and European equities down in the order of 4-6%, and the US 10-year rate trade in a 35bps range.  In currency markets the yen came under pressure as the BoJ made no tweaks to policy, maintaining its ultra-easy policy stance, against the global trend. Oil prices plunged and other commodities were weaker as investors considered recession risks for the global economy. AUD suffered against this backdrop, tumbling to a low just under 0.69.

Market participants will be glad to see the back of last week, which featured some key central bank policy meetings and data releases, generating some heightened market volatility. The combination of a higher VIX index and rising credit spreads saw our risk appetite index down to a two-year low, to just shy of the 25% mark, or near the bottom quartile of the past quarter century.

The S&P500 showed a small lift of 0.2% on Friday, but the weekly figure told the real story, with the index down 5.8%, making it a second week in a row of falling more than 5%. The US Treasuries market remained choppy on Friday, with the 10-year rate trading a 3.19-3.31% range but closing up just 3bps to 3.23%. For the week overall, the 10-year rate rose 7bps but that belied the massive 35bps trading range of 3.15-3.50%.

In his first public speaking engagement since FOMC day, Chair Powell reiterated the message, saying we “are acutely focused on returning inflation to our 2% objective”. The Fed released its semi-annual monetary report to Congress and Powell will be facing Q&A on it from lawmakers later this week. The report noted the committee’s commitment to restoring price stability as “unconditional”. In a Sunday interview, Cleveland Fed President Mester admitted the rising risk of recession and said that “it will take a couple of years” to see inflation back down to 2%.

In terms of Friday’s price action there were more interesting developments in currency and commodity markets.

There was much anticipation ahead of the BoJ’s latest policy meeting but in the event the central bank made no changes to its yield curve control policy, designed to keep the 10-year JGB no higher than 0.25% by printing money and buying as many bonds as required to do so.  This leaves the BoJ as an outlier in a world where other major developed central banks are either raising rates or, in the case of the ECB, signalling strong intention to do so.

Governor Kuroda conceded that the recent rapid weakness of the yen was negative for the economy, but he is evidently not concerned enough to do something about it. 
The yen had strengthened in the aftermath of the surprise 50bps hike by the Swiss National Bank the previous day, with USD/JPY down as low as 131.50, in anticipation that the BoJ could surprise the market as well.  In the event, the market was disappointed and sent USD/JPY back up towards 135.  Picking the BoJ to capitulate on its policy stance at some point remains a good call, but timing of this remains elusive.

Oil prices slumped, with WTI crude down nearly 7% to USD109.50 per barrel and Brent crude down 5½% to USD113, with sentiment for commodities weighed down by fears that rising interest rates would reduce global demand. The same reasons were responsible for widespread falls in commodities, with further weakness in iron ore taking its fall for the week to 12%, and notable price falls for copper, other metals, and agricultural products joining in as well.

This backdrop dragged down the AUD, seeing it tumble over 2% to just below 0.69, before closing the week around 0.6935. The NZD saw a milder fall, trading down to 0.6270 before ending the session close to 0.6315.

CFTC data showed that after net short speculative positioning in the NZD (as a % of open interest) reached a two-year high at the end of May, speculators were unwinding positions through the first half of June such that short positioning is now mild. This likely reflects a desired unwinding of positions during volatile market times for a small-country currency, rather than a renewed positive outlook for the NZD.  With no notable change in net short AUD positioning over that time, some of the recovery in NZD/AUD cross rate can be seen in that context, while the additional swing up to 0.91 to close the week can be put down to more nerves on the AUD, as energy and hard commodities came under pressure.

The USD regained some poise on Friday, unwinding a lot of its weakness during the previous session, and justifying some caution in prematurely declaring a major turning point in the currency. The DXY index recovered 1%, reflecting broad-based gains in the dollar in addition to the contribution from a weaker yen.

In economic news, US industrial production rose by a weaker than expected 0.2% m/m in May, led by a decline in manufacturing. That capped off a poor week for US data releases, driving Citigroup’s US economic surprise index down to minus 65, its lowest level in over two years. In an update published Friday, the NY Fed’s model of the US economy puts the chances of a hard landing in the US at 80%, and a soft-landing at 10%.

The domestic rates market had a relatively calm day compared to the turmoil earlier in the week. The curves had a flattening bias, with the 2-year swap rate up 4bps to 4.52% and 10-year swap down 3bps to 4.53%, taking 2s10s perilously close to negative territory again. Short-mid NZGBs rose slightly in yield against a 3bps fall in the 10-year rate to 4.26%. In the lead-up to the RBNZ’s next Monetary Policy Review on 13 July, the only key releases are survey data on business and consumer confidence.  Ahead of that meeting the OIS market prices a hike of 62bps, putting the market about mid-way between a 50bps or 75bps hike. In addition to the deteriorating global backdrop, it is fair to say that NZ recession risks increased substantially this week, with the 2-year swap rate up a chunky 51bps for the week.

The week ahead looks quieter, on paper at least, with the US holiday on Monday and seemingly less market moving events on the calendar.  There will be plenty of Fed-speakers in the aftermath of the 75bps rate hike last week.  Chair Powell will provide testimony to lawmakers from mid-week, which won’t reveal anything new, but in the Q&A session, things could get heated. RBA Governor Lowe will be giving a speech tomorrow, where he has the chance to show off his newfound hawkish credentials. The domestic economic calendar is light, with only second tier-releases. Globally, PMI data for June are released and CPI data for the UK, Canada and Japan.