Some reversal of Friday's price action, with US Treasury yields lower and USD lower. Further inversion of US 2s10s curve signaling recession ahead, but US equities unfazed

It has been a slow start to the week with little newsflow. The market has reversed some of Friday night’s post US payrolls reaction, seeing a broadly weaker US dollar and lower Treasury yields. Overnight, the NZD and AUD have outperformed, trading over 0.63 and 0.70 respectively, and currently sitting just under those levels.

Market participants have had the weekend to mull over the strong employment and wages figures from Friday’s US payrolls report, which saw some big banks change their call on the Fed to follow up with another 75bps hike mid-September at the next meeting, currently close to 70bps priced. After the big lift in rates across the board, the new week has begun with Treasury yields retreating a little, with the 2-year rate down 1bp to 3.21% and the 10-year rate down 6bps to 2.77%. To put these moves into perspective, last week’s 34bps increase in the 2-year rate was the second largest move in more than a decade, while the 18bps lift wasn’t that notable in the context of recent weekly gyrations.

While the data extinguished the view that the US economy was in recession in the first half of the year, the steady inversion of the 2s10 yield curve is making a recession from late this year or sometime next year increasingly likely, on a view that Fed policy tightening will kill the economy (and inflation) and eventually lead to rate cuts. That yield spread is currently around 45bps, the most inverted in 20 years, making it more inverted than even seen during the GFC. The question is turning from will or won’t the US economy end up in recession, to how deep will it be?

US equity investors haven’t got the memo yet on pending recession, with the S&P500 trading in and out of positive territory and down modestly as we go to print, and having recovered over recent weeks even as the yield curve has become more inverted. Under the hood, the WSJ reports that there has been fresh meme-stock enthusiasm, with dogs like Bed Bath and Beyond, AMC and Gamestop enjoying gains – AMC gaining nearly 20% after applying to list some preference shares under the ticker “APE”, exciting the punters who spend hundreds of thousands of dollar trading NFTs of bored apes in their spare time. Surely this is a sign of still-excess money supply in the economy.

In currency markets, the USD has given up some of its Friday gain, with dollar indices down about 0.2%. The only interesting story found in a desperate search to write about something today, was an FT article that Norway is set to curb electricity exports in a blow to European energy supplies. Norway’s hydro lakes are low and there is political pressure to refill the reservoirs rather than pump out electricity to export to the UK, Germany, Netherlands and Denmark. An export curb here can only add to the evolving energy crisis in Europe, one that looks to intensify as winter approaches. The story hasn’t affected the market, with the euro flat on the day and European gas futures settling lower.

The NZD and AUD haven’t been adversely affected by China’s decision to extend its military exercises surrounding Taiwan, continuing training “under real war conditions”, as the People’s Liberation Army has described it. The NZD dipped a little after yesterday afternoon’s inflation expectations data (see below) but rallied up through 0.63 overnight and is currently settling around 0.6280. Still, that data seems to have impacted the NZD/AUD cross, with the rate going sub-0.90 again. AUD has traded above 0.70 and is currently about 0.6980. Other NZD crosses are all higher to start the week.

The only data release of note was the RBNZ’s survey of expectations, which showed lower inflation expectations across the board, the key 2-year rate falling from 3.29% to 3.07%. Even though this is a survey of only 35 respondents and on that basis should never see the light of day, the market seems to take note of it as the RBNZ often refers to it.

NZ rates were much higher through yesterday, reflecting Friday night’s offshore move, until the lower inflation expectations figure sent rates down. After being up 12bps to 3.90%, the 2-year swap rate closed the day only 4bps higher at 3.83%, a sign of a fickle market. The 10-year swap rate closed up 6bps to 3.55%, after earlier trading above 3.60%.  A similar reaction was seen in NZGBs, and yields were up 4-5bps for the day.

There are only second-tier data releases over the coming day. NZ electronic card transactions data for July are released.  This series is volatile, but we see a negative result, down around 1½% for the month, or even worse in real terms, given the highly inflationary backdrop.  This view is based on MBIE weekly card data, which have shown a declining trend over the last few weeks, amongst other factors.