Risk appetite is weaker as global rates continue to skyrocket to fresh cycle highs. US Treasuries are up about 11bps and this backdrop is dragging down US equities even as earnings positively surprise. The NZ rates market is entertaining the idea of a jumbo 100bps hike next month and the peak OCR has pushed on up towards 5.5%. The USD shows broadly based gains, although the NZD only shows a mild fall. Falling UK rates have gone against the grain and further political shenanigans drive GBP underperformance.
UK inflation returned to a double-digit annual pace and was slightly higher than expected, at 10.1% y/y, back to a forty year high, with the core CPI up 6.9%. Canadian CPI inflation was also stronger than expected, up 6.9% y/y and the average of core measures at 5.3%. The data continue the theme of positive inflation shocks seen around the world, including NZ earlier this week, with policy tightening to date showing little impact on measured inflation.
Optimists point to leading indicators of inflation falling rapidly, setting up 2023 for a year of big declines in measured CPI inflation, while pessimists raise the idea that inflation will remain sticky, like it did in the 1970s, and it will take much higher real rates to bring inflation under control.
Recent moves in rates are consistent with the pessimists in charge, with higher global rates being the ongoing theme, with fresh highs in rates being recorded on an almost daily basis. Hawkish central banks are adding fuel to the rates selloff. Yesterday, former dove and newfound hawk Minneapolis Fed President Kashkari said that “if we don’t see progress in underlying inflation, or core inflation, I don’t see why I would advocate stopping at 4.5% or 4.75%, or something like that”, referring to the Fed Funds target.
Fed Fund futures continue to push higher and now peak at just under 5% in the first half of next year, up from expectations of 4.5% at the beginning of the month. US 2-year and 10-year Treasuries are higher to levels not seen since 2007/8, both up 11bps to 4.54% and 4.11% respectively.
A follow-up 75bps hike by the ECB next week has become the strong consensus view, with a move of at least 50bps in December to take its policy rate to 2%, or higher, by the end of the year. GC member Vasle from Slovenia argued for two 75bps hikes over the final two meetings of the year, with QT to follow next year. Such hawkish talk, alongside higher US rates, have pushed European rates higher, with Germany’s 2-year rate up 13bps, pushing it over 2% for the first time this cycle and the 10-year rate up 9bps to 2.37%.
Lower UK rates have gone against the grain, with rates lower across the curve, with 2-year gilts down 10bps, 10-year gilts down 7bps and 30-50 year rates down 32-38bps, as the market continues to settle after the recent turmoil. The BoE will be pleased that the end of its emergency buying operation and announcement of activation of QT from 1 November have done no harm to the market. Deputy Governor Cunliffe’s comments we noted yesterday that the LDI pension funds had raised enough capital to withstand further shocks, might also be a soothing influence on the gilts market.
Yesterday, the domestic rates market continued to be affected by the afterglow of Tuesday’s CPI shocker, with the OIS market pricing the November meeting at 4.345%, which implies a 75bps hike fully priced and a 38% chance of a jumbo 100bps hike. The peak OCR rate expected is now just under 5.5%, much higher than the 4.1% peak rate of the RBNZ’s August projection. Expectations of a more aggressive tightening cycle fed through into a 16bps lift in the 2-year swap rate to 5.30%, while 10-year swap rose 12bps to 4.93%. NZGBs were taken along for the ride, with the 10-year rate up 11bps at 4.66%.
Higher wholesale rates continue to feed into mortgage rates, with the 2-year swap rate up 56bps for the month to date. ANZ put through some chunky rises for mortgage rates, with its lowest available special rate (with LVR below 80%) being the 1-year at 5.99% (up 54bps). While this is well above other banks, it’s just a matter of time before they follow and soon all rates will have a 6% handle, a shock to those rolling off mortgage rates of 2-2½%.
In currency markets, higher NZ rates are struggling to keep pace with US rates, so there’s no NZD support from that source, while risk appetite is weaker, helping to support the USD across the board. The DXY index is up 0.8% on the day. The NZD has been one of the better performers (higher on most crosses), down to 0.5660, not much lower than this time yesterday. AUD has fallen by more to 0.6260, seeing NZD/AUD continue to drift higher to 0.9040, higher NZ-Australian rates being a key driver of the gains seen over the past week.
GBP is the weakest of the majors again, down to around 1.12, not helped by lower UK rates. Also not helping GBP, more UK political shenanigans are in the headlines, with Home Secretary Braverman forced to quit after a security breach (using her personal email for official business), but insiders calling it a pretext by PM Truss to oust her, a potential leadership rival. There is chatter about the government “imploding” with Cabinet Ministers looking to resign to force PM Truss to step down. NZD/GBP is higher at 0.5050, while underperformance of EUR sees NZD/EUR knocking on the door of 0.58.
USD/JPY continues to push higher, edging closer to 150, but perhaps not at the pace one would normally see against a backdrop of much higher global rates, given the ever-lurking threat of official FX intervention.
US equities are on track to break two days of solid gains, with the S&P500 currently down over 1%, weighed down by the higher rates backdrop. Earnings continue to roll in better than expected, with Netflix and Procter and Gamble the latest household names to positively surprise. The latter showed pricing power, as is becoming a theme, with lower volumes but higher pricing allowing earnings to be supported.
In the day ahead, Australian employment data are expected to be strong, keeping the unemployment rate steady at 3.5%. Only second tier US data are released tonight.
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2 Comments
"Yesterday, former dove and newfound hawk Minneapolis Fed President Kashkari said that “if we don’t see progress in underlying inflation, or core inflation, I don’t see why I would advocate stopping at 4.5% or 4.75%, or something like that”, referring to the Fed Funds target."
If asked, I'll say that people want the rates to go back to where it was last year. Hope and belief, reality is no one knows what interest rates will be in a year, two or five years.
"New Zealand named best country for expats outside of Europe"
And yet, in a year, 60,000 leave NZ. Sure, there are opportunities for bright people and talents In US/UK and elsewhere.
Is any political party working to address this, or an entrenched view that "its always been like this".
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