ECB hikes 75bps, indicates further hikes "over the next several meetings". Fed Chair Powell says we need to act as "strongly as we have been doing". Another 75bps hike later this month looks a done deal. Global rates continue to rise

It has been another action-packed day in financial markets, albeit with modest net moves in currencies and equities but more upward pressure on global rates following a hawkish 75bps hike by the ECB and Chair Powell reiterating the Fed’s hawkish outlook. The NZD is little changed from yesterday morning at 0.6060. The US and European rates curves are higher and flatter.

As widely anticipated, the ECB hiked policy rates by 75bps, taking the deposit rate to 0.75% and delivered a hawkish outlook.  The Bank’s inflation forecasts were ramped higher, with the CPI still averaging an above-target 2.3% in 2024.  The statement noted that “over the next several meetings the Governing Council expects to raise interest rates further…”, noting that future policy decisions would be data-dependent and follow a meeting-by-meeting approach. At the press conference, President Lagarde noted the reference to several meetings meant “probably more than two, including this one, but it’s probably also going to be less than five”.

The hawkish outlook saw the market ramp up its expectations of further tightening, leading to higher rates across the curve, driven by the short end, with Germany’s 2-year rate up a massive 22bps and 10-year rate up 14bps to 1.71%. Higher rates did little to support the euro, with the market more interested in the Fed’s hawkish comments, which sent EUR down half a cent or so before recovering, to be little changed on the day near parity.

Fed Chair Powell reiterated his hawkish message of Jackson Hole saying “we need to act now, forthrightly, strongly as we have been doing”. It all but seals the deal for another 75bps hike at the next FOMC meeting later this month and follows WSJ Fed-whisperer Timiraos’ report yesterday that alluded to a likely 75bps hike and from which we inferred was likely regardless of the outcome of next week’s US CPI report. Market pricing for the meeting lifted again, now at 72bps, up from 64bps at the beginning of the week.

Powell said that “demand is very, very strong still in the labour market”, noting high payrolls and elevated wages, and by raising rates was hoping to achieve a period of growth below trend. On that note, jobless claims fell for the fourth successive week to a three-month low of 222k, suggesting that the lift through July was likely due to seasonal factors that weren’t fully accounted for.

The US 10-year Treasury has traded a 3.20%-3.30% range overnight, with the rate currently near the higher end, up 5bps from the NZ close at 3.29%. The 2-year rate broke up through 3.50% for the first time this cycle and currently sits just below that mark. Despite the higher rates backdrop, US equities presently show modest gains after zipping in and out of positive territory.

UK PM Truss announced her much-anticipated energy package, which will cap the average cost of energy for households at £2500 a year from October for two years. Without the package, the typical household energy bill would have risen to £3500 from October and as much as £6000 next year.  Businesses will also get some relief but only for six months. The policy is expected to reduce inflation by 4-5 percentage points and while the cost will depend on how gas prices fare, the current estimate is around £150b. Longer term measures to address the energy crisis include removing a ban on fracking, speeding up nuclear power projects, and licensing more North Sea drilling projects. The surge in UK gilt yields continued, although spillover from higher European rates was a key factor this time, taking the UK 10-year rate up 11bps to 3.15%, their highest level since 2011.

Currency movements have been well contained despite the fresh overnight news. The AUD regained the ground lost after the dovish take on Governor Lowe’s speech (see below) and currently sits at 0.6750.  The NZD has traded around a 0.6030-0.6080 range and sits little changed from this time yesterday near 0.6060. The market continues to ignore the open mouth operations of Japanese government officials, who are tearing their hair out over the weak yen.  The latest blathering includes threats of intervention after a rare joint meeting of the Finance Ministry, BoJ and FSA. USD/JPY has been tracking sideways over the past 24 hours, close to 144.

NZ activity indicators for the manufacturing, wholesale and services sectors were a mixed bag but allowed us to firm up our Q2 GDP estimate at 1.4% q/q for next week’s release, lower than the RBNZ’s 1.8% q/q pick with the benefit of extra data. In any case, the figure will be inflated by the impact of eased lockdown restrictions and the underlying economic growth picture is much softer than that, with expected annual growth of just 0.3% y/y for Q2 being a more accurate reflection of economic performance.

The market had a dovish take on RBA Governor Lowe’s key post-meeting speech where he said that “…the case for a slower pace of increase in interest rates becomes stronger as the level of the cash rate rises”, although he added that the tightening from here would be “guided by the incoming data and the evolving outlook for inflation and the labour market”. His comments supported widespread views that a step down to hiking in 25bps increments might be imminent. Soon after, the Australian 3-year bond settled about 10bps lower in yield, but that move has reduced to 5bps with global forces back in charge.

The domestic rates market saw the full force of lower global rates from the overnight session and with some further spillover from lower Australian rates as RBA’s Lowe spoke. Swap rates fell 10-13bps across the curve, with larger falls at the longer end. NZGB yields fell by slightly more, with the 10-year rate down a chunky 15bps to 3.94%, with solid demand across the bonds tendered by the government. The Australian 10-year bond future is up 6bps in yield terms since the NZ close, setting the scene for higher rates on the open.

In the day ahead, NZ electronic card transactions, China inflation and Canadian labour market data are released. The market will be more interested in the EU’s plans for regulation in the energy market with the goal of containing gas and electricity prices, reducing demand for energy and avoiding growth-sapping power rationing this coming winter. Investors would be wise to remember ex-President Ronald Reagan’s famous quip that the nine most terrifying words in the English language are “I’m from the government and I’m here to help”.

On a final note, we pay tribute to Queen Elizabeth II and are deeply saddened by news of her death. She was a truly remarkable woman.