US Fed officials singing from the same songsheet - one good CPI print hasn't changed the policy outlook for higher rates. Market unwinds a little of the big moves seen last week. Yuan stronger on property market support

The new week has begun on a quiet note and with a small unwinding of some of the big moves seen post last week’s downside miss to the US CPI. US Treasury yields are up 6-7bps. US equities have spent most of the session in negative territory, but are flat as we go to print. The USD has is broadly stronger with JPY and GBP, two of the largest gainers in the aftermath of the CPI, showing the largest declines. The NZD is hovering around 0.61.

Last week’s big US CPI downside miss is still forefront of mind for investors, with the big question of whether this is a key market-friendly release that will ultimately see the Fed back-pedal on its very hawkish policy outlook or just noise in the data, another false dawn in the battle to bring inflation under control.

Last week, a number of Fed officials spoke after the CPI, acknowledging the better-than-expected result but warned that the tighter policy outlook hadn’t changed.  It looks like we’ll get a rinse and repeat from more Fed officials this week, with two more officials already adding to this theme.  Fed Governor Waller was out early yesterday saying “The market seems to have gotten way out in front on this…everybody should just take a deep breath—calm down. We have a ways to go yet.” Brainard has repeated the message overnight, saying “it will probably be appropriate soon to move to a slower pace of increases…but I think what’s really important to emphasise, we’ve done a lot, but we have additional work to do”.

The market has taken the message on board and the big moves we saw last week have not been extended, but have reversed a little. The S&P500 has spent most of the session in negative territory, and is flat as we go to print. US Treasury yields are higher across the curve, with the 2-year rate up 7bps and the 10-year rate up 6bps, both trading in tight ranges by recent standards.

In currency markets the USD has recovered some lost ground, with the DXY index up 0.5%.  JPY and GBP were two of the biggest winners post-CPI on a positioning squeeze and have underperformed as the new week begins. USD/JPY is up over 1% breaking back above 140, while GBP is down 0.6% to 1.1755. The NZD has tracked sideways slightly below last week’s high and currently sits around 0.61. Same goes for the AUD, which sits around 0.67.

Going against the grain, the USD weakened against the yuan, the market responding to further signs that China’s COVID restrictions in the current outbreak are much less restrictive compared to the Shanghai episode earlier in the year, and the news over the weekend that the government is looking to provide more significant support to the ailing property market. USD/CNY closed down 0.4% to just below 7.07.

The key moves on the crosses have been NZD/JPY up to 85.6, NZD/GBP up to 0.52 and NZD/CNY down to 4.31.

In other news, President Biden and Xi met in Indonesia and they are looking to restore better relations between the US and China. The countries will resume talks between senior officials and Secretary of State Blinken will visit China early next year. Biden said that the US would continue to compete with China but “this competition should not veer into conflict and underscored that the United States and China must manage the competition responsibly and maintain open lines of communication”. Biden stressed to Xi that longstanding US policy towards Taiwan hasn’t changed, but he raised objections to China’s coercive and increasingly aggressive actions toward Taiwan.

NZ rates were higher yesterday, driven by global forces, but with some outperformance against Australia. The government launched the new May 2034 nominal green bond, where demand has been strong and price guidance was narrowed to the bottom end of the +5-8 bps spread over the April 2033 bond.  NZGB yields were 4-5bps higher across the curve.  Swaps showed a steepening bias, with the 2-year rate up 1bp to 4.95% and the 10-year rate up 8bps to 4.61%.

NZ’s performance of services indicator was surprisingly strong, lifting to 57.4 to near the top end of its historical range.  This looks to be driven by the “re-opening” theme, with the “cultural, recreational and personal” industry leading the way.

The economic calendar in the day ahead is full. REINZ housing market data are likely to show weak sales and ongoing falls in house prices. China monthly activity data for October are expected to show ongoing weak growth momentum by Chinese standards. Japan and Euro area GDP for Q3 should show small increases. US PPI data will be less interesting, coming after last week’s downside miss for the CPI. FOMC members Williams and Harker will be speaking, no doubt repeating the message to the market about not getting too excited by one good CPI print.