US equities are slightly weaker after the big lift over the past couple of sessions. The 3.55% level for the US 10 year proved a step too far and brought out buyers, with the bond currently down 2bps for the day. Currency moves have been modest, with the NZD is tracking close to 0.65.
A glance of the WSJ’s front page website conveys a sense of stagflation – an article reporting that employers are shedding temporary workers at a fast rate, an early warning indicator of the labour market (110,800 temp workers culled in the last five months of 2022); an article on household name 3M cutting 2,500 jobs after a marked slowing in December, the business confronting difficult conditions in overseas markets and weakening consumer demand; and an article reporting Walmart is to raise its starting wage from $12 to $14 an hour (16.7%), although its difficulty in finding staff probably reflects the new rate is still below $15 minimum wages for Amazon and Target.
In scheduled economic news, global PMI data were mixed. Figures for the US lifted off recent lows, but the key services sector reading of 46.6 still suggested economic contraction and relatively weaker growth momentum than either the Euro area or UK. Still, the higher reading came as a relief to the market, which earlier in the year reacted to the plunge in the more widely followed ISM services index. On the back of the report, US rates rose 2-3bps to their overnight peak (the 10-year rate at 3.55%) as did USD indices, before the moves were fully unwound. Aiding the retracement, another regional PMI survey – this time the Richmond manufacturing index – fell to its lowest level in over 2½ years of -11 after +1 in December.
The expected lift in Euro area PMIs was slightly greater than expected, with the services index up to a six-month high of 50.7 and back into expansionary territory – a contrast to the US report. Plunging gas prices, helped by the usually warm winter, has lifted confidence in the region and economic activity. The UK services index fell by more than expected to 48.0, its lowest level in a year, with the report commenting on a laundry list of growth hurdles, including industrial disputes, staff shortages, export losses, the rising cost of living and higher interest rates.
US equities had a crazy open, with a technical glitch causing a wild swing in a small number of stocks, but the current state of play is the S&P500 showing an insignificant fall after a more than 3% rally over the past two trading sessions. As noted, the US 10-year rate peaked at 3.55% and a notable retracement has it currently down at 3.49%, about 2bps below its level at the NZ close.
Currency moves have been modest. GBP has been the weakest of the key majors, falling over 100pips after the weaker PMI data before trying to regain some poise, currently 1.2330 and NZD/GBP up to 0.5280. The NZD has been range bound between approx. 0.6470-0.6520 and currently sits close to 0.65. The AUD has been tracking sideways and is at 0.7045. The lower global rates backdrop has supported the yen, with USD/JPY modestly lower and close to 130.
Domestic rates pushed higher following the previous overnight move in the US, with some mild swap curve steepening and rates up 3-6bps. The 2-year swap closed back over 5%. NZGB yields were up 3-4bps across the curve, with the 10-year rate (2033) closing at 4.09%, and some 14bps higher from Thursday’s multi-month low. The February meeting OIS drifted up further, closing at 4.90%, consistent with a 65bps hike.
The day ahead is a biggie with NZ and Australian CPI data for Q4 released. With the benefit of more recent information, the market consensus of the CPI rising by “only” 1.3% q/q is well below the RBNZ’s November MPS pick of 1.7%. Core measures will be more important and will help shape market expectations for the February meeting, whether they gravitate towards a 50bps hike or 75bps. Australia’s inflation report is likely to be stronger than NZ’s and we aren’t expecting the result to get in the way of another 25bps hike from the RBA in early February.
The Bank of Canada is expected to hike by 25bps to 4.5%, but some expect an on-hold decision. The Bank is getting close to the end of the tightening cycle so expect some tweaks to forward guidance.
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