Recession concerns continue to dominate markets at present. A soft ISM manufacturing survey on Friday night added to investors’ global growth fears, contributing to another big fall in global rates, with the US 10-year rate falling further below 3%. Industrial commodity prices were also lower on demand concerns, with copper prices now 25% off their recent highs. Against a risk-off backdrop and a broadly stronger USD, the NZD broke below key support at 0.62 on Friday, hitting its lowest level in two years, before recovering to that level by the close of trading. NZ rates experienced big falls on Friday, and they are likely to extend those moves when trading opens this morning.
The ISM Manufacturing survey was weak, with the index falling from 56.1 to 53, its lowest level since mid-2020. The key New Orders sub-index fell into contractionary territory (49.2 from 55.1) while the Employment index fell further below 50, suggesting manufacturers are pulling back on hiring. There was also some evidence of easing supply chain pressures, with Supplier Deliveries and Order Backlogs both hitting their lowest levels since 2020. The weaker than expected ISM survey follows on from disappointing US consumer confidence and consumer spending data last week which fuelled concerns about growing US recession risk.
Global rates, which had already been pushing significantly lower ahead of the ISM survey, got another jolt lower after the data was released. The US 10-year rate fell as low as 2.79%, 22bps lower on the day at one point, before recovering to 2.88%. Thin liquidity conditions ahead of the long weekend in the US likely exacerbated the moves. There were big moves (lower) in other bond markets too, with the UK 10-year rate falling 15bps and the German 10-year rate down 10bps, capping off a 40bps yield decline in just three sessions.
The market retains an aggressive near-term rate hike profile for the Fed, with around a 70% chance of a 75bps hike priced in for the meeting later this month, in-line with Fed officials’ recent messaging. But the market has moved to price in an increasingly aggressive rate cut profile for the Fed into 2023 and 2024, consistent with a growing chance of recession. Around 60bps of Fed cuts are now priced in for 2023.
Like bond markets, commodities are also suggesting the market is growing more concerned around recession risk. Copper, often seen as a bellwether of global economic activity, was down 2.5% on Friday, leaving it some 25% off its peak reached in early March, while nickel fell 3.9%. Wheat futures were 10% lower last week and are now trading below where they were before Russia’s invasion of Ukraine, despite fears the war will severely disrupt supplies. Oil prices, in contrast, were slightly higher last week. JP Morgan’s research team published a note suggesting oil prices could reach as high as $380 a barrel in a scenario where Russia retaliated by cutting its production by 5 million barrels per day.
In other economic data, European headline inflation hit a new record of 8.6% y/y in June, well up on the 8.1% reading the previous month and slightly above market expectations. In contrast, core inflation was lower than expected, at 3.7% y/y, although the downside surprise was likely related to Germany’s recently announced public transport subsidies rather than an easing in underlying inflationary pressures. With inflation running well above the ECB’s forecasts, the market expects a 25bps hike later this month and a 50bps hike in September. There was little market reaction to the data, with investors’ focus having shifted to recession risk. The German 2-year rate was 13bps lower on Friday, at 0.52%, and it is now around 80bps off its highs from little more than two weeks ago.
Despite the negative news flow and generally downbeat market sentiment, US equities rebounded on Friday, the S&P500 increasing 1.1% and the NASDAQ managing a 0.9% rally. Even so, equities were lower on the week, by 2.2% on the S&P and 4.1% on the NASDAQ, consistent with the deteriorating growth signals coming from other asset classes.
In the FX market, the USD was broadly stronger against the risk-off backdrop, with the BBDXY index increasing 0.3%. The AUD and NZD both fell to two-year lows, the latter breaking through key support at 0.62 during our time zone amidst the deteriorating risk backdrop and falling commodity prices. The NZD fell to around 0.6150 in the overnight session before recovering back above 0.62 by the close of trading, still down by around 0.6% on the day. The AUD was harder hit, with the NZD/AUD cross rallying back above 0.91 by the end of the week. Both antipodean currencies were almost 2% lower last week. The JPY was the only G10 currency to appreciate against the USD on Friday, gaining 0.4%, amidst the sharp falls in US Treasury yields.
Continuing the run of dreadful survey data in New Zealand, the ANZ consumer confidence index fell further in June, to just 80.5, its second-lowest reading on record. Multiple factors are weighing on consumer confidence at present, including high inflation, sharply rising mortgage rates, and now falling house prices. Combined with the pessimistic activity indicators from the business surveys and the deterioration in global growth indicators, this all points to elevated NZ recession risk over the next year or so. Separately, NZ building consents declined in May (albeit from very high levels) and we think residential investment will decline in the next 12-24 months in response to the softening in the housing market.
NZ rates were sharply lower on Friday, and the yield curve steeper, in response to global forces. The 2-year swap rate was down 17bps, at 3.90%, its lowest level in almost a month, with the market paring back its expectations for the terminal OCR to below 4%. 5-year and 10-year swap rates were 14bps and 12bps lower respectively, similar-sized movements to those in Australia during the NZ trading session. With global rates having fallen significantly further since the NZ market close, local rates are likely to extend their recent moves lower when trading opens this morning.
It should be a quiet session ahead given the Independence Day holiday in the US. As for the rest of the week, the nonfarm payrolls report takes place on Friday night, where the market is looking for another robust 273k monthly jobs print and for the unemployment rate to hold steady at an ultra-low 3.6%. The ISM Services Index, released on Wednesday night, is expected to fall to 54, which would be its lowest level since mid-2020. Closer to home, the RBA is expected to raise its cash rate by 50bps at its meeting tomorrow, with the market pricing 44bps and 25 of 26 economists expecting such a move. Locally, the highlight is the QSBO business survey tomorrow which will likely reveal struggling activity indicators but continued labour market tightness and elevated inflationary gauges.