Markets have shown signs of stabilising overnight after their big moves post the upside surprise to US CPI. The US 10-year rate is little changed, still within striking distance of its recent 11-year high, while the S&P500 and NASDAQ are broadly flat as well. The JPY has been the standout mover in the currency market, up around 1%, as Japan steps up its FX intervention warnings. The NZD is hovering around the 0.60 mark.
Markets have largely consolidated overnight after the huge moves seen in the aftermath of the US CPI release the previous night. US Treasury yields are at similar levels to the NZ close yesterday, with the 10-year rate trading this morning at 3.42% and the 2-year rate at 3.79%. The S&P500 is down marginally overnight (-0.2%) after yesterday’s 4.3% slump while the NASDAQ is up slightly. The EuroStoxx 600 index was down 0.9%, playing catchup to the late session falls in US stocks yesterday. The BBDXY USD index is down 0.2% after the previous day’s 1.2% surge higher, its biggest one-day appreciation since mid-2020.
Most economists think the Fed will stick with its plan to hike by 75bps at next week’s meeting, albeit with an outside chance of a mega 100bps hike (which the market sees as a ~25% chance) and with Fed officials likely to lift their forecasts for the peak in the cash rate for this cycle. The 2y10y yield curve remains deeply inverted, at -37bps, reflecting market expectations the Fed will continue to aggressively raise rates in the near term before a major economic downturn sees it turning to rate cuts from late next year.
Following the sharp fall in the JPY in the wake of the US CPI release, Japanese policymakers have stepped up their verbal intervention a notch. With USD/JPY approaching the 145 level yesterday, Finance Minister Suzuki called the “speculative” currency moves “very sudden” and refused to rule out FX intervention. Later yesterday afternoon, the Nikkei reported that the BoJ, who would act as agent for the MoF if it intervened, had called around banks to check FX rates, a tactic sometimes used to warn the market that FX intervention is under consideration. USD/JPY has peeled off its highs of close to 145 since news of the BoJ checking FX rates, now back to around 143.20, around 1% lower on the day. While there has been no intervention yet, the message from Japanese officials appears to be that their tolerance for further sharp falls in the JPY is limited.
The US bond sell-off is also putting additional pressure on the BoJ’s Yield Curve Control policy, with the 10-year Japan bond rate hitting the 0.25% upper limit yesterday. In response, the BoJ announced increased bond purchase operations, although the 10-year yield continues to linger around the upper bound, likely reflecting market nerves that the BoJ could amend the policy at its meeting later this month. Analysts have speculated that the BoJ could either increase the upper-limit around its 0% 10-year yield target, say to 0.50%, or shorten the target bond from the 10-year maturity to the 5-year point, although most think any such move is more likely next year rather than next week. BoJ Governor Kuroda has consistently pushed back against suggestions the BoJ might consider such a change, although some market participants will remember his forceful pushback against negative rates shortly before the BoJ unexpectedly announced it would cut the deposit rate to -0.10% in early 2016.
Were any official Japanese intervention to combat the weakness in the JPY to take place, it would likely put additional upward pressure on global rates. Any changes to the Yield Curve Control framework that allowed for higher Japanese 10-year yields would likely spill over to other markets. Alternatively, if Japan intervened in the currency market, it would need to sell US Treasury bonds to raise cash to purchase the JPY. Japan is major holder of US Treasuries, with a reported US$1.2tn in foreign currency reserves.
Movements in other currencies have been muted, the EUR still hovering just below parity and the GBP trading around 1.1540. Meanwhile, the PBOC continues to lean against the weakness in the CNY as it approaches the psychologically important 7.0 level. The NZD has tracked sideways within a narrow trading range over the past 24 hours and is trading this morning around the 0.60 mark. We think the near-term risks are skewed towards a lower NZD from here, possibly down to the 0.57-0.58 region, given the still-weak outlook for global growth, the likelihood of further weakness in the CNY, and continued NZ economic headwinds. The blow-out in the NZ current account deficit, which hit 7.7% of GDP in Q2 and is on track for record highs, is another medium-term headwind for the NZD, albeit not a near-term driver of the currency.
UK annual CPI inflation fell back to 9.9% in August, marginally lower than expected but still miles above the BoE’s 2% inflation target. In contrast, core inflation was slightly stronger than market expectations, at 6.3% y/y, highlighting that underlying inflation pressures remain much too high. The market sees around a 75% chance of a 75bps hike from the BoE next week. The market paid no attention to the US PPI report overnight given the more important CPI data had already been released the night before.
On a more positive note, the Chinese city of Chengdu, with a population of ~21 million people, will start easing Covid restrictions for parts of the city today, as flagged over the weekend. While the easing of restrictions in Chengdu and Shenzhen are positive, there remains the ever-present risk of future growth-damaging lockdowns with the authorities appearing set on keeping Covid contained until at least after the Party Congress next month.
The European Commission officially released its plans for dealing with the energy crisis in Europe overnight, with an estimated €140b expected to be raised from levies on lower cost energy producers to be recycled back to households and businesses. The proposal still needs to be signed off by EU countries and several have already flagged their own measures, including France which plans to cap gas and electricity price increases by 15% next year. European gas prices continue to yo-yo around, up almost 10% overnight, but they remain well below the panic-driven levels seen in late August, reflecting some market optimism that government measures and rising gas storage levels will avert the worst-case scenario around gas shortages this winter.
NZ rates were sharply higher yesterday, as the full effects of the post-US CPI sell-off in US Treasuries reverberated to our market. The 2-year swap rate was 14bps higher on the day, at 4.29%, while there was a flattening bias to the curve – like the US and Australia – with the 10-year swap rate up “only” 9bps. With terminal rate pricing for the Fed converging on the RBNZ (around 4.35%), the spread between NZ and US 2-year swap rates has narrowed to just 15bps, its tightest level since early 2021.
In other news, the government announced the official launch of New Zealand’s Sovereign Green Bond Programme, with the inaugural deal expected later this year. Green bonds provide financing for specific climate change mitigation and environmental outcomes. The government’s entry into green bonds will help boost the broader sustainable finance market in New Zealand.
It’s another busy session ahead. First up this morning is the release of NZ Q2 GDP, where we are picking a 1.4% post-Omicron bounce back in growth over the quarter. Given the data is both dated and noisy (the range of estimates is between 0.4% to 1.6% q/q among the four major domestic banks), the market should look through the release. The Australian labour market report is released this afternoon, with the market looking for the unemployment rate to remain at all-time low of 3.4%. Since the upside surprise to US CPI, the market is now putting a better-than-even chance that the RBA hike by 50bps again next month. US retail sales is the highlight tonight while the Empire and Philadelphia Fed business surveys are released also.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.