Global rates continue to fall away as monetary policy tightening expectations fade. But higher Australian CPI sees economists scrambling to revise rate projections up but market already there

The global bond market rally continues after reaching oversold territory at the end of last week, with lower rates egged on by expectations of an imminent Fed pivot. The Bank of Canada has provided some support to that view, hiking rates by “only” 50bps. This triggered a boost to Canadian and US equities. The USD shows further signs of vulnerability on the Fed pivot view, with another session of broad-based losses. The NZD has blasted up through 0.58 while the AUD has had a look above 0.65.

It has been a case of “more-of-the-same” with risk appetite improving against a backdrop of expectations of less aggressive global monetary policy tightening, driving lower bond rates, higher equities and a much weaker USD. As a reminder, this was triggered by Friday’s night’s “planted” WSJ article and backed up by the Fed’s Daly of the strategy around dialling down the path of rate hikes, followed by weaker US data and now, overnight, further supported by the Bank of Canada.

The Bank of Canada hiked its policy rate by “only” 50bps to 3.75%, a smaller hike than the 75bps widely expected and nearly fully priced, but a large contingent of economists did pick the outcome, a continuation of the stepping down following rate hikes of 100bps and 75bps at the previous two meetings. Governor Macklem said that “this tightening phase will draw to a close…we are getting closer, but we aren’t there yet”.

The smaller rate hike had a significant impact on Canadian rates, with the 2-year and 10-year bond rates down 26bps and 19bps respectively, but the impact on CAD was fleeting. USD/CAD briefly spiked to 1.3650 before returning to 1.3560. The dialling down of rate hikes follows the RBA’s recent move in that regard and adds to the speculation that the Fed is on the cusp of doing the same. S&P 500 futures shot up after the rate decision. The index had opened on a weak note, down as much as 0.9%, absorbing the weaker than expected earnings from Microsoft and Alphabet after the bell yesterday, and it recovered strongly although that gain has since faded, the index back into the red.

The US 10-year rate is down 8ps to 4.02, trading just below the 4% mark overnight, and now some 30bps below the peak rate seen Friday night just ahead of the influential WSJ article by Nick Timiraos. Key European 10-year rates are down 5bps.

In economic data overnight, the US merchandise trade deficit unexpectedly widened in September to $92.2b after imports rose for the first time in six months. Retail and wholesale inventories also grew by less than expected. The data suggest some possible downside risk to Q3 GDP, released tonight, where the consensus expects growth of 2.4% (annualised q/q%). New home sales resumed their downtrend in September after the large positive surprise in August.

The new UK government pushed out the date of new economic and fiscal forecasts to 17 November, upgrading the plan to produce a mini-Budget. Sources indicate that the new Chancellor is looking to plug a fiscal shortfall of £35b to get public finances on a more sustainable path. This will require a combination of tax increases and spending cuts so expect some fiscal austerity ahead. The delay to the release gives more time for UK gilt yields to settle lower, which would help the fiscal metrics and encourage less fiscal belt tightening. While the delayed update means that the BoE won’t have the benefit of the new fiscal update for its policy decision on 3 November, the Bank would be able to incorporate some assumptions after keeping in close contact with the Chancellor.

The FT reported that Russia conducted its first nuclear weapons drill since its invasion of Ukraine, noting that the Russian armed forces practised what defence minister Shoigu called a “mass nuclear strike with strategic attack forces in response to a nuclear attack by our adversary”, as Putin monitored events via videoconference from the Kremlin. The risk of some nuclear “event” doesn’t appear to have affected risk appetite.

In currency markets, the USD has continued to come under significant pressure against the backdrop of higher risk appetite, no doubt egged on by a closing of significant long positions that have prevailed for some time. The DXY index is down for the fifth day running, down over 1% on the day and nearly 3% over the past week.

Strong gains have been evident for most of the key majors, with CAD lagging the move but still 0.4% stronger from this time yesterday. EUR has blasted well up through parity, now 1.0075, GBP is up through 1.16 and Japan’s MoF will be relieved that USD/JPY is down to 146.40. Even the yuan is stronger, with USD/CNH down to 7.20 and USD/CNY down to 7.17, dollar weakness combining with talk that Chinese state banks were actively selling the dollar.

The NZD and AUD has been the best performers since this time yesterday, the AUD up some 1½% to 0.6490, after briefly trading above 0.65 and NZD up 1¼% to 0.5830. 

Yesterday, Australian CPI inflation rose to a 32-year high of 7.3% y/y with the key trimmed mean core measure up 1.8% q/q and 6.1% y/y, the latter 0.6 percentage points ahead of economists’ expectations. Despite the shock for economists, who seemed to be blind to the positive inflation shocks seen in the rest of the dollar-bloc (US, Canada and NZ), the market was well prepared for a positive surprise which contained the market reaction. 

Australia’s 3-year bond future hovered about 5bps higher in yield terms after the initial shock faded, despite the barrage of economists upgrading their rate hike outlooks, extending expected hikes into 2023, but still well shy of where the market has been trading for some time. Following the RBA’s step down to a 25bps hike earlier this month, expectations remain that the Bank will hike in 25bps steps from here. NZD/AUD fell as low as 0.8950 last night, but has since recovered to 0.8980, barely lower from the pre-CPI level.

The ANZ NZ business outlook survey still painted a picture of a sluggish economic backdrop, with most activity indicators slipping in October (more so when seasonally adjusted), from already-depressed levels. The pricing intentions indicator fell for the third consecutive month, pointing to easing inflationary pressure but still uncomfortably high, with a net 64.5% of businesses still pointing to pending price increases and well above the pre-COVID average of 25%.

The NZ rates market closely followed moves offshore, which drove lower rates across the board alongside some curve flattening.  The 2-year swap rate fell 3bps to 5.16% and the 10-year rate fell 15bps to 4.80%, both now well down from the peaks seen at the end of last week (16bps and 21bps respectively).  The NZGB 10-year rate fell 11bps to 4.47%.  Today is the last tender before NZGBs enter the key World Government Bond Index so we’d expect to see strong demand. NZDM confirmed that the much-anticipated Green bond will be launched next month and will be a 2034 maturity.

In the day ahead, RBNZ Governor Orr will be speaking at the INFINZ conference at 9:45am, where he will be sharing insights on his recent attendance at the IMF World Bank meetings. We’ve already heard feedback from these meetings, with concerns over the path of the global economy and battle against high inflation.

The ECB meeting tonight will be the key focus for the market, where all but two economists of 51 surveyed by Bloomberg expect a 75bps hike in the key policy rates, with the deposit rate lifting to 1.5% and near fully priced by the market. The outlook is likely to convey a message of getting policy to at least neutral (seen to be 2%), before becoming more data dependent thereafter. We’ve already noted the US Q3 GDP data to be released, and it comes alongside durable goods orders and jobless claims data.