Nerves ahead of the Fed’s policy meeting later this week have driven US Treasury rates up to fresh highs, with the 2-year rate just under 4% and the 10-year rate breaking above 3.5%. The USD remains well supported, while the NZ dollar continues to underperform, falling to fresh multi-year lows against the USD and AUD.
It has been a quiet start to the week for financial markets, with the UK and Japan on holiday and attention focused on the funeral of Queen Elizabeth II. Newsflow has been light and trading has been cautious ahead of a busy end to the week, with the Fed, BoJ and BoE meetings from Thursday morning onwards, NZ time.
The market is priced for a 75bps hike from the Fed, with about a 20% chance of a jumbo 100bps hike, although the latest WSJ article from Nick Timiraos doesn’t signal a jumbo move, which pretty much seals the deal for the Fed to opt for 75bps in our view. Focus will be on the projections and commentary from Chair Powell, and on that note the market continues to price in a hawkish outlook.
US Treasury rates continue to push higher, with the 2-year rate recording a fresh 15-year high just below 3.97%, and currently up 8bps to 3.95%. The 10-year rate traded to a fresh 11½-year high just under 3.52%, currently up 4bps to 3.48%. So the 2s10s curve continues to invert and the gap sits at minus 46bps. The peak Fed Funds rate sits just under 4.5% for March next year. It will be difficult for the Fed to match hawkish market expectations in terms of the peak rate, but the market still prices in easier policy through the second half of next year, something the Fed won’t likely be sanctioning, with the dotplot unlikely to signal easier policy until 2024.
US equities have begun the week on a cautious note. Following last week’s hefty 4.8% fall, the S&P 500 opened down 0.8%, but has since recovered and it has traded in and out of positive territory. In the only economic news of note, the NAHB housing market index, a measure of US homebuilder sentiment, fell for the ninth consecutive month, by 3 pts to 46, its lowest level since April 2020. The indicator suggested the housing market was in recession, with higher mortgage rates (recently reaching a 14-year high above 6%), unaffordable houses and persistent building material supply disruptions.
Currency movements have mostly been small, with a theme of ongoing USD support and the NZD has notably underperformed, down 0.7% from last week’s close at about 0.5950, after trading at a fresh 2½-year low of 0.5930. Other key majors are down by 0.1% or less, apart from the yen, which is 0.3% weaker on the back of higher global rates. Thus, the NZD is weaker on all the key crosses, with NZD/AUD trading as low as 0.8862, a fresh 5-year low.
After the large increase in rates last week, domestic rates began the new week with falls of 3-4bps across NZGBs and 5-6bps across swaps during a quiet trading session. The performance of services index didn’t excite the market, which showed a solid increase to 58.6. Recent data have likely been distorted by the easing of lockdown restrictions and the recovery in tourism likely inflates the figure.
In the day ahead, Japan CPI data hold more interest than usual, two days ahead of the next BoJ meeting and where there is significant political pressure developing on the Bank to have regard to the depreciating yen. Further signs that inflation is increasing can only add to that pressure, particularly if headline CPI hits the 3% y/y mark and the core measures also nudge to fresh highs. Canadian CPI data are also released in the day ahead, alongside US building permits and housing starts data.
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4 Comments
"The peak Fed Funds rate sits just under 4.5% for March next year. It will be difficult for the Fed to match hawkish market expectations in terms of the peak rate, but the market still prices in easier policy through the second half of next year, something the Fed won’t likely be sanctioning, with the dotplot unlikely to signal easier policy until 2024."
Talk about a Fed pivot, ain't coming soon.
Unless they make a point of "getting it all out of the way, now"?
Not that I expect it, but if they went 1.5% tomorrow and announced they'll now 'sit back and see how doing the bulk of their expected tightening in one hit, goes', they might get away with it.
But like you, I doubt 'slowly and gently' is going to achieve much from here, up. The Shock Factor of change has worn off.
I try and look at the fundamentals rather than being driven by the chart. To the extent I am influenced by the chart, it is to try and figure out the behaviours of the financial reef fish. But to a large extent those behaviours are unfathomable.
A figure of 0.55 is a possibility, but I don't think it will go that low unless there is a crash in export prices, and I don't see anything on the horizon suggesting that. The implications of the current level around 0.59 are already profound.
I see considerable likelihood that the NZD will depreciate by another 5-10% against the AUD.
KeithW
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