Weaker risk appetite is evident overnight as the market digests the heavy newsflow so far this week, concerns about the weak economic outlook and soft US earnings reports not helping. The S&P500 is on track for a third consecutive daily fall after another failure to sustain a break above its 200-day moving average. US Treasury yields are higher after hitting a four-month low near the NZ close yesterday, which saw NZ rates show a notable fall. The risk off backdrop has seen the NZD and AUD underperform, with the NZD tracking below 0.64 and the AUD going sub-0.69.
As headlined by both the FT and WSJ, the US Treasury began deploying extraordinary measures to keep paying the government’s bills due to the debt ceiling limit. Until Congress votes on raising the debt ceiling – something that is a big political issue – the special measures can continue until June, at which point unless the debt ceiling is raised, the US would default on its debt obligations. It’s a game that regularly gets played amongst politicians and the market will be more alert to the risk of default closer to the June deadline.
We doubt those headlines had any impact on US Treasuries, with the rise in the 10-year rate being coincidental. It fell during NZ afternoon trading to as low as 3.32%, a level not seen since mid-September and is currently back up to 3.41%.
At Davos, ECB President Lagarde said that “Inflation by all accounts, whichever way you look at it, is way too high…we shall stay the course until such time that we have moved into restrictive territory for long enough so that we can return inflation to 2% in a timely manner”. She noted the more positive news in the last few weeks, adding “it’s not a brilliant year but it’s a lot better than we have feared”. She did not repeat her December line that the ECB would raise rates by 50bps for a period of time, but her hawkish colleague Knot told CNBC that future rate hikes would be “at a constant pace of multiple 50bp hikes”.
In an interview BoE Governor Bailey noted that “corner has been turned” on inflation and the most likely outcome was inflation “will fall quite rapidly this year”, a lot to do with energy pricing. However, he noted the pressure on the labour market, with the shrinking labour force leading to higher wages and inflation. Without endorsing market pricing of a 4.5% peak in the policy rate (currently 3.5%), he suggested that market expectations were now more closely aligned with the BoE’s thinking.
US second-tier economic data released showed further declines in housing starts and building permits, a negative Philly Fed survey – although not as dire as the recent NY Empire survey – and initial jobless claims better than expected at just 190k last week, although taken with a grain of salt with seasonal adjustment issues at this time of year. The continuing claims indicator we have been watching closely is still signalling an economic recession.
Yesterday, Australian labour market data were on the soft side of expectations, particularly the reported 15k fall in employment in December. However, that should be seen in context of the 58k lift in November, with the data overall still consistent with a very tight labour market, which keeps the pressure on the RBA for further rate hikes.
Still, there was a notable reaction in the rates and FX market, adding to downside pressure on rates seen earlier in the day and the AUD weakening. By the time of the NZ close, the Australian 2-year swap rate was down some 15bps and the 10-year ACGB was down about 20bps.
The AUD extended its fall overnight as weaker risk appetite took over, reaching a low of 0.6872 before gravitating back to around 0.69. It has been the weakest of the majors since this time yesterday, down around 0.9%. The NZD followed in sympathy, although not quite to the same extent. The NZD found some support around 0.6365 and currently sits a little under 0.64. NZD/AUD broke up through 0.93 in the aftermath of the jobs reports and has since fallen back down to 0.9260. Other key majors show little net movement over the past 24 hours, seeing NZD crosses lower, down in the order of 1% against EUR, GBP and JPY.
The backdrop of lower US and Australian rates put downside pressure on NZ rates and the 2-year swap rate closed down 11bps at 4.87%, its lowest close since mid-October. The 10-year swap rate ended the day down 16bps at 4.09%. The first NZGB tender of the year saw strong demand for the 2028 and 2032 bonds, less so for the 2041s. With the tailwind of lower global rates, the 10-year NZGB closed down 14bps at 3.93%, the lowest close since August for the 2033 bond. Since the NZ close, the Australian 10-year bond future is up about 5bps in yield terms, which should see a mild upside reversal in NZ rates on the open.
PM Ardern announced that the date of the next general election would be 14 October and that she would be stepping down as PM by 7 February. There was no market reaction, with recent polls pointing to a good chance of a change of Government at the next election anyway and, even then, domestic politics being way down the list of things top-of-mind for market participants at present.
NZ food price inflation rose to a fresh high of 11.3% y/y, solidifying our Q4 CPI pick, in data to be released next week, at 1.3% q/q and 7.1% y/y, 0.4 percentage points below the RBNZ’s November forecast.
In the day ahead, there are a number of Fed speakers on the circuit, including Brainard, Williams, Harker and Waller. Data releases include NZ’s manufacturing PMI, which has recently been in contractionary territory, Japan CPI, expected to stretch up to a fresh multi-decade high adding to the madness of the BoJ’s ultra-easy policy stance, and second-tier data elsewhere.
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