Risk appetite is cautious as good news on the US economy spells bad news for rates and thereby the equity market. Stronger US JOLTS data and consumer confidence, alongside further hawkish Fed-speak, sees US equities down for a third consecutive session and slightly higher US Treasury yields. The USD and the EUR have been well supported while commodity currencies underperformed.
US equities are weaker for the third successive session in the aftermath of Fed Chair Powell’s Jackson Hole speech late last week. Overnight, a couple of other factors have been thrown into the mix. Risk appetite soured after Reuters reported that Taiwan’s military fired warning shots at a Chinese drone. It was later confirmed that live ammunition was used at a drone that failed to heed warnings as it flew over an outer island on Tuesday. Equities headed even lower after good news on the US economy and more hawkish Fed speak. The S&P500 is currently down 1.3%.
US JOLTS data showed job openings at 11.2m in July, over 800k stronger than expected, with a large chunk of that reflecting positive revisions. That saw the jobs per unemployed ratio, something Fed Chair Powell has previously noted as important, rise from 1.87 to 1.98, nearly back to its cyclical peak. The Conference Board measure of consumer confidence was more than 5pts higher than expected at 103.2, its highest level since May, driven by both the expectations and current conditions components. Much lower gasoline prices and the strong labour market were likely factors.
The combination of a strong labour market and lift in confidence reinforced market expectations that a 75bps hike was more likely than 50bps at next month’s meeting (69bps is priced). Fed speakers have also been out in force, speaking in a unified voice that reiterates Chair Powell’s hawkish missive at Jackson Hole last week. New York Fed President Williams argued that policy would need to move into restrictive territory and stay there “for some time…this is not something that we’re going to do for a very short period of time”. Richmond Fed President Barkin said “we’ll do what it takes to get there” with reference to the 2% inflation target. Atlantic Fed President Bostic noted the “unshakeable” duty to curb inflation but noted that if incoming data showed inflation had begun slowing, it might give reason to dial back from hikes of 75bps.
US Treasury rates are higher, with the good economic news and hawkish Fed speak in the driving seat after the news on Taiwan temporarily sent rates lower. The curve has flattened, with the 2-year rate up 4bps to 3.47% and the 10-year rate up 1bps to 3.11%.
Elsewhere, Euro area economic confidence fell to its lowest level in 19-months against the backdrop of surging energy prices over the past month. Germany CPI data were in line, with the annual figure rising to a 40-year high of 8.8% y/y. Additional ECB members floated the idea of a possible 75bps hike next week, with Solvenia’s Vasle saying that he supported a rate hike that “could exceed 50bps” and Estonia’s Muller said he wants 75bps to be among the options debated. The market currently prices 66bps of hikes for the meeting.
European gas prices fell again, following up yesterday’s near-20% fall with another 7% drop, taking the Dutch TTF benchmark down to EUR253/Mwh. Gazprom will shut down the Nordstream pipeline to Germany for three days from today, but the market has become less nervous on data showing good progress in filling gas storage sites and the expected regulatory intervention to cap gas prices for power generation.
The oil market has been choppy in illiquid trading conditions. Yesterday’s 4% jump in Brent crude to USD105 per barrel has given way to a 5% slump, seeing it back down to USD99.
In currency markets, tumbling gas prices and hawkish ECB-speak have helped support the euro, even against the backdrop of solid support for the USD. EUR has settled above parity and is the only key major managing to show a gain against the USD overnight. The AUD and CAD have underperformed against the backdrop of falling energy prices, while GBP continues to ominously trend lower against the backdrop of economic recession risks and surging inflation pressure. After Citigroup’s recent projection that UK CPI inflation would hit 18.6% with upside risk, Goldman Sachs projected inflation of 22.4% and a 3.4% decline in GDP if gas prices stabilised around current levels. GBP is down to 1.1655.
The NZD is weaker, down to 0.6130 but has gained on the NZD/AUD cross to 0.8950, supported by lower energy prices, and NZD/GBP is slightly higher at 0.5260. Its biggest fall is against the euro, with NZD/EUR down to 0.6120.
Yesterday, the PBoC set the yuan fix at its strongest level compared to Bloomberg survey estimates in three years, some 249pips stronger on USD/CNY than the average estimate. This extended the run to five trading days for which the PBOC has set the yuan stronger than expected, a clear signal that it is trying to moderate the depreciating forces currently being exerted by the market. The stronger fixings haven’t prevented USD/CNY rising to as high as 6.92, putting the yuan at its weakest level in two years. It is now looking inevitable that the psychological 7 level will be tested in the not-too-distant future. Based on the close historical relationship between USD/CNY and NZD/USD, fair value for the NZD drops just below 0.60 once USD/CNY reaches 7.
The NZGB market continued to trade heavy, with little change in rates across the curve against a backdrop of lower Australian yields and 2-3bps falls across the swaps curve. The 10-year NZGB was unchanged at 3.98% while 10-year swap fell 3bps to 4.12%.
The economic calendar in the day ahead is full. Of the key releases, the ANZ NZ business outlook survey should still show depressed activity levels and high inflation indicators, it’s just a matter of degree. China PMI data are unlikely to be strong against a backdrop of COVID restrictions, a depressed property market and drought. Euro area CPI and Canadian GDP are released tonight, while in the US, ADP employment, the Chicago PMI and a speech by the Fed’s Mester will all be on the radar.
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