On Friday, risk appetite improved as the US stock market opened, driving strong gains in equities, higher global rates and a reversal in prior USD support. Commodity currencies outperformed, seeing the NZD close the week around 0.6470.
US equities finished last week on a stronger note for no obvious reason, other than recovering after three days of selling pressure, meaning that even after a 1.9% lift in the S&P500 on Friday, the index still managed to be down 0.7% for the week. Notable news included a strong gain in Netflix after a better-than-expected result and Alphabet adding to the array of tech companies announcing significant layoffs, with a plan to cull 12,000 jobs or some 6% of its workforce.
Unusually, the tech sector led the recovery in equities even though US Treasury yields were much higher. The 10-year rate was 9bps higher over the day to 3.48%, making it a 16bps sell-off from the low NZ Thursday afternoon, reversing a strong rally earlier in the week. Market chatter was that the selloff was exacerbated by higher European rates and an imminent wave of corporate and Treasury supply this week.
We heard a lot from Fed speakers last week and Governor Waller was the latest to join many of his colleagues in saying that he favoured a 25bps increase at the policy review next week, notable considering he has been at the hawkish end of the spectrum. He added that he expected to support “continued tightening of monetary policy”. While he conveyed a more hawkish view on policy compared to market pricing beyond the next meeting, he acknowledged some data dependency, saying he has “got no problem saying we should think about changing policy” if the market’s more optimistic view on inflation dynamics proves right.
Over the weekend, WSJ Fed whisperer Nick Timiraos suggested that Fed officials are preparing to slow interest rate increases for the second straight meeting next week (as widely acknowledged and priced by the market) and added that they could begin deliberating at the meeting “gathering how much more softening in labour demand, spending and inflation they would need to see before pausing rate rises this spring”.
In Friday night data, US existing home sales continued to slide – a record consecutive 11-month streak – down 1.5% m/m in December, and down 34% y/y.
UK data were weaker than expected, with consumer confidence still hovering below GFC-like levels and retail sales continuing to trend lower, the 1.1% monthly fall in core sales volumes taking annual sales down 6.1% y/y – the high inflation backdrop resulting in a significant pullback in spending. The data weren’t market-moving with the poor health of the UK economy well acknowledged and that isn’t expected to stop the BoE from delivering a 50bps hike next week, although there is a small chance of a smaller 25bps hike.
Japan’s CPI data continued to explode higher, with the headline increase of 4.0% y/y at a fresh forty-year high and the so-called core-core measure, which strips out fresh food and energy, hitting 3% for the first time in thirty years. The data didn’t sway Governor Kuroda speaking in Davos, as he repeated the official line that higher inflation is transitory and the BoJ will continue with its expansionary policy.
Commodity currencies outperformed on the higher risk appetite backdrop with overnight moves of 0.6% for the NZD, AUD and CAD. The NZD closed the week around 0.6470, shy of the mid-week peak of 0.6530, but still up a robust 1.4% for the week – an outperformance that saw it make up lost ground earlier this year on key crosses. JPY was Friday’s laggard, with USD/JPY up 0.6% Friday night to close the week at 129.60, against the backdrop of higher global rates and the BoJ’s determined policy stance in the face of stronger inflation. NZD/JPY was up a chunky 1.8% for the day to 83.8.
NZ rates were higher on Friday against the backdrop of higher global rates, with swap yields closing 7-9bps higher and NZGBs 8bps higher across the curve, lifting them from the multi-month closes on Thursday. Trading activity today will be quiet with the Wellington Anniversary holiday.
The event calendar is sparse as the new week begins, but there are some important releases this week. Domestically the key release is the Q4 CPI on Wednesday, with the consensus at 1.4% q/q, below the RBNZ’s November MPS estimate of 1.7%, the consensus having the benefit of extra data such as incorporating the fall in petrol prices since November. The breakdown of the result will be as important as the headline result and a friendly breakdown could see a significant reaction, with the market possibly further reducing the chance of another jumbo 75bps hike next month. The Australian Q4 CPI print is released the same day and will also be important RBA policy expectations.
Globally the Bank of Canada is expected to hike 25bps, but with many seeing a chance of a pause. Whatever the move, the end of the Canada’s tightening cycle is seen as imminent. Other key global economic releases include US GDP for Q4 and global PMIs for January.
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