Global rates have surged as Fed speakers take control of the narrative and remind the market of plans to tighten a lot further to bring inflation to heel. US House Speaker Pelosi landed in Taiwan and buy the rumour, sell the fact on this has been an added source of upward pressure on rates. The US Treasuries sell-off has been led by the belly of the curve, with the 5-year rate up 22bps on the day. The USD has reversed it recent course, showing a broadly based gain. The AUD has underperformed, following the RBA’s comment yesterday that policy was not on a pre-set course.
The remarkable fall in rates since the Fed’s meeting last week was somewhat of a mystery, a mix of technical factors, low liquidity summer trading conditions and some interpreting Powell’s comments as dovish, even though his comments on rates fitted the Bank’s June projections, which called for significantly more tightening ahead, even if it meant the pace of future rate hikes would be less than 75bps a clip. A reality check has ensued, with the market finally getting the memo that nothing has swayed the Fed from its prior path on policy rates, reminded by a trio of FOMC members overnight.
As we go to print, US Treasury yields are much higher across the curve, the 2-year up 21bps, 5-year up 22bps and the 10-year rate up 17bps, the latter at 2.74% now almost back to the pre-FOMC level. The market has increased the probability of another 75bps hike in September, with that meeting trading up 4bps to over 60bps.
Some of the lift in rates might also be attributed to a reversal of the rally seen yesterday after confirmation from local sources that US House Speaker Pelosi would visit Taiwan. She landed on the island last night to become the highest ranking American politician to visit in 25 years. In a statement she noted that her visit “in no way contradicts longstanding US policy…the US continues to oppose unilateral efforts to change the status quo…and our congressional delegation’s visit to Taiwan honours America’s unwavering commitment to supporting Taiwan’s vibrant democracy”. China’s initial response is a statement saying that it would take “necessary measures” to defend its sovereignty and announced military drills in six areas surrounding the island over coming days.
On the Fed-speak noted, San Francisco Fed President Daly said that the Bank was “nowhere near being almost done on rate hikes”, pointing out that current 9.1% inflation was “far too high” and it was “long way to go” to get back to the 2% target. Cleveland Fed President Mester shared the Fed’s commitment to get inflation under control and said she would want to see “very compelling evidence” month-to-month changes in inflation are moving down in determining when the tightening cycle has accomplished its goal on prices.
Chicago Fed President Evans reiterated the Fed’s baseline case on rate hikes as published in its last projection. This was consistent with smaller future rate hikes. He said that in spite of less favourable inflation reports he is “still hopeful” that his previous expected rate path of a 50bps hike in September and two 25bps hikes in November and December “is a reasonable one”, although he didn’t rule out another 75bps hike. He added that two further 25bps hikes in Q1 and Q3 next year would take the funds rates to “a sufficiently high level” of 3.75-4%. Evans was basically outlining the last set FOMC projections and revealed that he was in line with the median, broadly consistent with current market pricing for this year, but in no way validating the market pricing of an easing cycle beginning from early next year.
The economic calendar has been light, but US job openings fell by more than expected to a nine-month low of 10.7m, from an upwardly revised 11.3m in May. The 605,000 monthly decline therefore was rather steep. The data signalled some softening in the labour market, but with 1.8 jobs for every unemployed person in June, the market remained very tight. There was little change in the quits rate of 2.8%.
US equity markets have been whippy, but the backdrop of higher rates sees the market showing a modest loss, not bad considering the extend of the move in Treasuries. The USD has been on a weaker trajectory since last week’s FOMC meeting but has swung higher as the market opens its ears to the Fed speakers, with the key dollar indices up 0.7%.
The AUD has underperformed following yesterday’s RBA policy update. As expected, the Bank raised its cash rate target by 50bps to 1.85%, taking the cumulative tightening over four months to 175bps. It continued to guide markets to further hikes but some were surprised to see a line added that policy “is not on a pre-set path”, interpreted as a signal that the pace might not continue at 50bps. This triggered a strong rally in the rates market, seeing the 3-year bond fall as much as 10bps in yield terms. Global forces and perhaps a re-think of whether that initial market reaction was appropriate has seen an 18bps reversal, with that rate now some 8bps higher compared to the pre-RBA level. The AUD fell over ½ a cent in the hours after the statement and the USD rebound overnight has kept the AUD from reversing course. The currency is down 1.3% from this time yesterday to 0.6925.
The NZD has fallen 1% over the past 24 hours, seeing some spillover from a weaker AUD and USD strength in charge. NZD is trading at 0.6260 but NZD/AUD is up to 0.9040, some 20 pips higher versus pre-RBA levels, and down from a peak last night of 0.9085. NZD crosses are lower, less so against the yen, affected by the much higher global rates backdrop. After dipping below 130.50, USD/JPY almost reached as high as 133.
Yesterday, the domestic rates market continued to be driven by global forces, with the long end of the curve moving one for one against US and Australian rates. The 10-year swap and NZGB yields fell about 11-12bps, with 2-year rates down 4bps. The offshore moves since the NZ close will see a sharp reversal today, with the Australian 10-year rate up about 9bps since then.
In the day ahead, the Fed’s Bullard will be speaking, one of the more hawkish and credible members of the FOMC. NZ labour market data are expected to show that despite a soft economy the unemployment rate could fall to a fresh multi-decade low, with the range of estimates as low as 2.8% and with the consensus at 3.1%. Wage inflation data will remain very strong. These data should keep the heat on the RBNZ to deliver another 50bps hike later this month. The ISM services index tonight is the key global release, with the consensus picking a further fall to a two-year low of 53.5.
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