Further UST curve inversion sees 2s10s spread at the most inverted since 1981, warning of pending economic recession. NZ rates much higher, while another failed government bond tender sees NZGB curve flattening

It’s been a slow news day, but US curve flattening pressure remains, seeing a new extreme of Treasuries 2s10s curve inversion, as investors converge to the Fed’s way of thinking. A weaker USD saw the NZD trade just under 0.6390, but a reversal sees it back near 0.6340.

The strong payrolls and ISM services data released Friday night continues to reverberate through the fixed income market, pushing up short end rates as the market buys into the Fed’s view of two more rate hikes and a chance of a third. The 2-year rate is up 4bps to 4.46% while the 10-year rate is little changed at 3.60%, driving the 2s10s curve to a new threshold for inversion of minus 86bps, the greatest since 1981.  The curve’s predictive power in forecasting economic recession is impeccable at this level, the only uncertainty being one of timing.

Richmond Fed President Barkin added to the plethora of Fed-speak we’ve seen this week, with his views consistent with others on the committee, noting still-elevated inflation that “makes the case for us to stay the course…I think we’ve still got a ways to go”, so nothing new there.

US initial jobless claims rose for the first time in six weeks, by 13k to a higher-than-expected 196k. A warmer than usual January might have been a factor in holding claims down, but the path from here looks to be higher. The Challenger job layoff series points to a significant pending increase in jobless claims and, to add to the high-profile announcements that now seem to be regular, Disney said it would cut 7,000 jobs or 3% of its workforce.

Germany CPI inflation for January came in much weaker than expected at a five-month low of 9.2% y/y, after technical issues delayed its release last week. But with significant weighting changes and no information of how the figure was adjusted for government subsidies to cut energy bills, the apparent fall in inflation needs to be interpreted with a degree of caution.

Equity markets were well bid at the US open, but gains have been pared and the S&P500 is now down slightly for the day. The Euro Stoxx 600 index closed 0.6% higher.

In currency markets the USD was broadly weaker, paring some of its recent strong recovery, but over the last couple of hours some reversal has occurred and net movements for most majors hasn’t been significant. A notable exception is the 2.3% overnight gain in the Swedish krona, with some spillover into NOK, after new Governor Thedeen showed off his hawkish credentials. While the 50bps hike in the policy rate to 3.0% didn’t surprise, the Bank said it would actively sell bonds (quantitative tightening) from April, allowing its asset holdings to reduce at a faster pace, and the statement made direct reference to the krona, overtly stating that “a stronger krona would be desirable”.

On the back of a weaker USD, the NZD rose overnight before meeting some resistance just under 0.6390 and has since slipped back to just 0.6350. The AUD broke up through 0.70 before trading back to around 0.6950.

NZ rates were again much higher across the curve yesterday, with global forces playing a role.  Not helping sentiment, the government’s latest bond tender failed for the $200m of 2027s on offer, with only $188m of bids, reflecting some market indigestion for these short-mid end bonds. This was the second failed tender in two months, following a decade of no failed tenders. It was a different story at the long end of the curve, with one bidder taking out the $50m 2051 bonds on offer clearing 3bps through the pre-tender mid, and the 2034 bonds were also well supported. Strong bidding for the longer-dated bonds means that the government need not worry about overall demand for NZ debt at this juncture.

The tender result triggered some curve flattening and, at the close, short end NZGBs were up 8bps for the day and longer-dated bonds were up only 3bps.  The swaps curve showed a parallel shift, up 8-9bps throughout – the 2-year swap rate at 5.03%, up a massive 33bps from the multi-month low of 4.70% at the end of last week. The market is back to pricing an OCR as high as 5.35%, from the 5.16% level at the end of last week, a move not out of line with what we’ve seen for the US market since Friday.

On the economic calendar today, NZ PMI manufacturing and electronic card transactions data are released for January with both measures recently consistent with the economy going backwards. The RBA’s statement on monetary policy will flesh out the forecasts around its slightly more hawkish tilt in policy earlier this week.  UK GDP data tonight are expected to be flat for Q4, following the contraction in Q3, so only a minor forecast error away from meeting one definition of economic recession.