Some market nerves are evident ahead of a massive week loaded with event risk, with tonight’s US CPI release one of the key acts. Risk appetite is weaker, with a higher VIX and the NZD and AUD underperforming. US Treasuries shows a slightly higher and flatter curve overnight.
There hasn’t been a great deal of news to start the week but the event calendar is filled with plenty of event risk, including central bank meetings of the Fed, ECB and BoE, amongst others, US CPI and retail sales data, global PMIs, and NZ GDP amongst other economic releases. Ahead of all this there is a risk-off vibe. While US equities show modest gains, the VIX index is up to a one-month high of 24.5, after last week’s push higher.
In economic news, UK GDP bounced 0.5% m/m higher in October after the 0.6% fall in September that was dragged down by the holiday associated with the funeral of Queen Elizabeth II. Expected monthly falls in November and December would put Q4 growth into negative territory, following the contraction in Q3, consistent with the economy being in economic recession.
China credit data for November showed a seasonal bounce-back from a poor October, but by not as much as expected by the consensus. The data were consistent with a slowing in bank and other lending, with broad credit up by 10% yoy, returning to the 15-year low of late 2021 – unresponsive to the easing in monetary policy. The end of the zero-COVID policy won’t change that over the short-term as the virus is unleashed across the country, but things will improve later next year after the wave of infections subsides.
Reports from Beijing suggest that hospitals are being overwhelmed with COVID patients who have been indoctrinated to fear the virus. A Beijing city government spokesman said that the rapidly spreading outbreak has put significant short-term pressure on medical services and drug supplies. It is clear the transition to living with COVID is going to get very messy over the short term and cause more short-term economic disruption than under the previous zero-COVID policy. But the impact on the market so far has been minimal as investors focus on the endgame, which is a much-improved economic outlook for China from the middle of next year.
The NY Fed’s survey of consumer expectations showed a 0.7% fall in year-ahead inflation expectations to 5.2%, its lowest level in over a year, no doubt lower gasoline prices a key factor here. Three-year and five-year ahead inflation expectations both fell by 0.1% to 3.0% and 2.3% respectively.
Oil prices have bounced 2-3% higher after last week’s 11% plunge that saw prices at their lowest level this year. North America’s Keystone pipeline remains shut with no timeline for reopening. Meanwhile the EU ban on imports of Russian crude oil by ship is seeing shipments diverted towards China and India according to ship tracking data.
US Treasuries show a flattening bias, with the 2-year rate up 4bps and the 10-year rate up 1bp on the day, with the latter up 3bps to 3.59% from the NZ close. Higher global rates on Friday night fed into higher domestic rates yesterday, with swap rates up 4-5bps across the curve and a similar move seen across NZGBs.
In currency markets, the risk-off vibe sees the NZD and AUD underperforming, with the NZD down to around 0.6375 and the AUD at 0.6740. The yen has also been weak for no obvious reason, with USD/JPY up to 137.60. While NZD/AUD and NZD/JPY are slightly higher, NZD/GBP has slipped below 0.52 and NZD/EUR is down to 0.6050.
On the calendar ahead, REINZ data should continue to paint a picture of a very weak NZ housing market while food price data will feed into Q4 CPI calculations. Tonight sees the release of UK labour market data but the key release is the US CPI. Expectations are for another 0.3% m/m lift in the core CPI, with more chance seen of a larger 0.4% gain than an undershoot. Previous CPI releases this year have had an outsized market reaction, such is the market sensitivity to inflation indicators at this juncture of the economic cycle.
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