Global and NZ rates continue to rise, capping off a poor week for the bond market; NZ 2-year swap rate up over 40bps for the week. JPY volatile after reports of a surprise imminent BoJ Governor appointment

The sell-off in the global bond market extended on Friday, with US Treasuries up 4-8bps across the curve. For currencies, CAD outperformed following a boomer employment report, JPY was volatile after reports of a surprise new appointment for the new Governor role but with little net movement by the end of the day, and the NZD closed the week just over 0.63. The domestic rates market capped off the week with another decent rise in yields across the curve.

There was plenty of news to digest on Friday. The theme all week was higher rates in the afterglow of the strong US employment and ISM services report a week ago, and the market still in reversal mode, unwinding the fall in rates seen earlier this year. Philadelphia Fed Harker added to the chorus of Fed speakers we heard from last week, who all seem to be on the same page in arguing for at least two more rate hikes and some risk of needing to go further than that.

The 2-year rate was up 4bps to 4.52% and the 10-year rate was up 7bps at 3.73%, up 23bps and 21bps for the week respectively. US data weren’t market moving, with consumer sentiment on the University of Michigan survey up to a 13-month high of 66.4, driven by the current conditions component, with a small dip in the expectations component. On inflation expectations, the key 5-10 years ahead series was unchanged at 2.9%, stuck in the middle of the range it has been in over the past couple of years.

What was market moving was Canada’s employment report for January being a boomer, having similarities to the US figures out a week ago – with employment up a much stronger than expected 150k, and the unemployment rate nudging down to 5.0% despite a decent lift in the participation rate. Also like the US, wage inflation moderated to 4.5% y/y. The recent “pause” guidance by the Bank of Canada was data dependent and the strong report increased the chance that another 25bps hike might be implemented over coming months. CAD was the strongest of the major currencies, USD/CAD ending the day down 0.8% at 1.3345, supported by higher Canadian-global rate spreads, with NZD/CAD down to just over 0.84, a 2½ month low.

Also market moving, there were reports that Japan’s PM Kishida would select Kazuo Ueda, a professor and former BoJ board member, to be the next BoJ Governor. Media reported that hot favourite and current deputy Governor Amimaya was not interested in the job. The reports saw a sharp lift in the yen, seeing USD/JPY down as much as 1.3%, before completely reversing the move by the end of the day after Ueda told reporters that “the BoJ’s current policy is appropriate and monetary easing needs to be continued at this point”. Analysts seemed to take some comfort from the new appointment, with Ueda seen to be a balanced and sensible choice. Appointing an outsider could encourage an end to the BoJ’s yield curve control policy, but exact timing of such a move remains uncertain.

In other economic news, UK GDP was flat in Q4, as expected, following a 0.2% fall in Q3, avoiding a second consecutive contraction and thereby dodging recession – for now – on one popular definition. Still, the UK economy retains the record of being the worst performing economy of the majors since COVID19 struck and the outlook for this year remains bleak.

China inflation data remained low by global standards, allowing the PBoC to keep policy stimulatory. New loan growth and aggregate financing figures were strong, as they normally are at the start of the year, with an additional boost from the government’s encouragement to front-load credit extension to drive economic growth, albeit lending to households continued to remain weak.

The NZD remained range-bound and closed the week just over 0.63. The AUD also showed little net movement Friday night, closing the week around 0.6920, seeing NZD/AUD stuck around 0.9120. EUR and GBP were on the softer side of the leaderboard, seeing these NZD crosses modestly higher.

Oil prices were up over 2%, with Brent crude closing over USD86 per barrel, after Russia said it planned to cut its oil production by 500,000 per day next month in retaliation against western sanctions, a move that has been hinted at by Moscow for some time. The S&P500 rose a modest 0.2% on Friday, for a 1.1% fall for the week, making it the worst week since mid-December.

NZ rates continued to push higher, driven by global forces, with the tone not helped by a couple of rare positive domestic economic surprises – the manufacturing PMI rising above the 50 mark for the first time in four months and electronic card transactions rising 3.3% m/m in January, bouncing back after contractions in November and December. Volatility in the data and conflicting signals from other spending measures mean that the data need to be interpreted with caution.

The sell-off in the rates market was led by the short end, with the 2-year swap rate up 8bps to 5.11%, capping off a 40bps surge for the week and back to where it was a month ago. The 5-year rate was up 6bps and the 10-year rate was up 1bp. NZGBs showed a similar move. The OIS market is back to pricing a peak OCR of 5.43%, and an extra full 25bps hike compared to a week ago, with higher risk premia likely behind some of the move rather than being a direct read on monetary policy expectations.

The calendar is light for the day ahead and the key focus for the week will be the January US CPI report on Tuesday night.  Revisions to weightings and seasonal adjustment factors, released at the end of last week, mean that inflation was stronger than previously expected towards the end of last year. The market is picking a core increase of 0.4% m/m, the same as the upwardly revised figure for December. Given the current sensitivity of the market to US inflation news, a shock in either direction would likely have an outsized impact on markets, and the data will set the tone of trading for the rest of the week.