For no obvious reason, the USD met some significant selling pressure during Friday’s Asian trading session, but it managed to regain some poise and was flat during the overnight session. The NZD ended the week just over 0.61. More hawkish Fed-speak kept upside pressure on US short-end rates, seeing the 2-year rate end the week at a fresh 15-year high and resulting in more yield curve inversion. US equities ended the week on a strong note, fuelled by short-covering.
After having powered up to a fresh 20-year high mid-week, the USD met some fresh broad-based selling pressure during Friday’s Asian trading session for no obvious reason other than risk appetite looked to be improving, as evidenced by rising S&P futures. This saw the NZD appreciate through 0.6150, having traded below 0.60 just 48 hours earlier. The overnight session saw some settling down in FX markets and the NZD closed the week just above 0.61, up nearly 1% for the day and relatively flat for the week overall.
The AUD saw an even bigger gain, closing up 1.3% for the day at 0.6845. Other major currencies also ended up well above their lows earlier in the week. USD/JPY ended the week around 142.50. Some might point to another barrage of open-mouth operations from Japan’s MoF as having some effect in supporting a recovery in the yen, but that would be stretching the truth.
The S&P500 rose 1.5%, taking its weekly gain to 3.7%. Rather than fundamentals driving the market, traders saw this as a short-covering rally, with the most-shorted stocks performing the best, and after the put/call ratio had got to an elevated level the previous week, as investors had sought some downside protection. As the market rose, options traders were forced buyers to hedge their positions.
US short end rates were pushed higher against a backdrop of more positive risk sentiment and another bout of hawkish Fed-speak. The 2-year rate closed the day up 5bps to a fresh 15-year high of 3.56% and there was some notable curve inversion, with the 10-year rate down 1bp to 3.31%.
Fed Governor Waller said he favoured another “significant” increase in interest rates, joining St Louis Fed President Bullard who said he favoured another 75bps hike. Waller said that “until I see a meaningful and persistent moderation of the rise in core prices, I will support taking significant further steps to tighten monetary policy”. This is consistent with the message we heard earlier last week from WSJ Fed-whisperer Timiraos and Chair Powell – that this week’s CPI print is unlikely to sway the Fed to change the base case of another 75bps hike later this month. The market effectively sees this as a done deal, with the Fed Funds and OIS markets pricing in 73bps.
The widely-anticipated meeting of EU Ministers on an Energy Plan didn’t come up with specific measures, but a call for some urgent action and more work needed to be done to reach agreement on proposals. On the table are a gas price cap (some dispute over whether this should be on domestic prices, all imports, or just Russian imports) and a proposal for a windfall levy on energy producers. Since increased EU regulation of the energy market was first mooted a couple of weeks ago, the market has taken an optimistic view of proceedings. The Dutch gas benchmark fell another 6% on Friday to EUR207, its lowest close in four weeks.
In economic news, China inflation data were softer than expected, one of the few major countries seeing inflation running below target, which can only encourage further easing in monetary policy, against global trends. Credit data remained weak, with demand for loans suppressed by the zero-COVID policy and slump in the property sector.
Canadian employment unexpectedly fell for a third consecutive month in August and the unemployment rate leapt 0.5 percentage points to 5.4%. The weak report saw the market pare back rate hike expectations and Canada’s 2-year rate fell 6bps, going against the grain of higher short rates in the US and Euro area.
Over the weekend, news broke of Ukraine making significant territory gains in North-East Ukraine, with Russian forces making a hasty retreat. The working assumption for most is that the war will end when Russia decides it will end (some time away) but a tail risk now could well be that the war ends on Ukraine’s terms, which would be a significant game-changer for financial markets.
NZ rates had a rollercoaster ride on Friday, pushed higher on the open by global forces and reversing course through the afternoon as global rates tracked lower. There was little net change in NZGB yields, while swap rates ended the day 2-4bps lower. After the close, Fitch Ratings upgraded NZ’s long-term foreign-currency issuer rating from AA to AA+. There are no implications for the market, as this simply brings it into line with S&P’s AA+ rating for NZ, which itself is below the Aaa rating attributed by Moody's Investors Service.
In the day ahead, UK month activity data are released tonight and expect some further ECB-speak following the 75bps hike last week. The balance of speakers on Friday night was on the hawkish side, as reflected in the policy meeting.
The key data release in the week ahead is the US CPI (Tuesday night, NZ time) with another soft print expected for August, with lower gasoline prices dragging headline inflation slightly negative and core inflation expected to be 0.3% m/m. Other key releases include US retail sales, Australian employment and China activity data at the end of the week. The BoE meeting previously scheduled for this week has been pushed out a week, to allow a period of mourning after the death of Queen Elizabeth II.
Domestically, the NZ current account is expected to show further deterioration, with the consensus picking a deficit of -7.5% of GDP. There is a wide range of estimates for NZ Q2 GDP on Wednesday (0 to 1.8% q/q), with the consensus at 1.0% and BNZ at 1.4%. Recent data have been distorted by COVID-related lockdown restrictions and the bigger picture is one of a soft underbelly to the economy, as reflected in poor levels of business and consumer confidence.
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