If there were any market nerves ahead of the release of tonight’s key US CPI report, it isn’t obvious by looking at overnight trading, perhaps a reflection of how the market traded through last week, when US equities fell and global rates skyrocketed. Markets have settled, with the S&P500 currently up 1%, the Nasdaq up 1½% and modest changes in US Treasuries, albeit with a clear flattening bias – the 2 year rate up 2bps to a fresh 3-month high of 4.54% and the 10-year rate down 1bps at 3.72% from last week’s close.
The economic calendar has been light but what caught our eye was Bank of America US credit card data showing signs of “a meaningful increase in spending” during the weeks after Christmas. The Bank suggested that consumers could have held back pre-Xmas holiday spending to maximise savings from post-holiday discounts and also noted the increase in minimum wage in over 20 states, the 8.7% lift in social security payments, and resilience of the labour market as factors contributing to increased spending through January. BoA has a top-of-the-range pick for US retail sales, released Wednesday night, at 3.0% m/m for January, well above consensus of 2.0% and an ex-autos and gas pick of 2.4% compared to consensus of 0.9%. If the data are this strong, then there could be an outsized reaction in the USD and Treasury yields, depending on how the CPI release plays out tonight.
The EU commission upgraded its economic growth outlook for the region and downgraded the inflation outlook, supported by an easing of the energy crisis. The euro area is expected to dodge economic recession with growth for 2023 revised up 0.6pps to 0.9%, recovering to 1.5% next year. Inflation is expected to decelerate from 8.4% last year to 5.6% in 2023 and 2.5% in 2024. European equities have also adopted a positive tone, with the Euro Stoxx 600 index closing up 0.9%.
In other news, both the FT and WSJ’s lead articles are on the US-China balloon drama, with China accusing the US of 10 balloon incursions in its airspace last year, following the US recently shooting one suspected Chinese spy balloon alongside three other unidentified flying objects. Perhaps to diffuse the possibility of World War III kicking off, out over the last hour or so, Bloomberg reported that US Secretary of State Blinken is considering meeting with China’s Foreign Minister Wang Yi at a security conference later this week.
In currency markets, JPY has been the clear underperformer, with USD/JPY up 0.9% from last week’s close to 132.50. It isn’t obvious why. Initial market reaction to Friday’s report that outsider Ueda would get the nod to be the next BoJ Governor was a stronger yen and that seemed like the right response to us, with an outsider more likely to get policy back on an even keel compared to the prior hot favourite and insider Amimaya. But the reversal of the yen goes against that theory.
The USD itself is on the softer side of the ledger, supporting a 0.9% gain for the NZD to 0.6360 and a 0.8% gain for the AUD to 0.6970, both trading near their highs for the session. EUR and GBP have made smaller gains, so NZD crosses are modestly higher, with the largest gain seen for NZD/JPY, up a chunky 1.7% to 84.3.
The domestic rates market sell-off extended yesterday, playing catchup to global moves on Friday night with some added underperformance mixed in. The performance of services index added to the theme of better January data, with a modest lift to 54.5. Swap rates rose 11-13bps, with a slight flattening bias, and the 2-year rate climbing to 5.23%, a five-week high and extending the sell-off since the early-February low to a massive 53bps. The OIS market is back to pricing a peak OCR rate close to 5.5%, in line with the RBNZ’s November projection. NZGBs showed similar moves to the swap market, but with the ultra-long bonds outperforming, rising by “only” 8-9bps for the 2041s and 2051s.
The economic calendar ahead is full, with the key release being the January US CPI report. Given market sensitivity to inflation outcomes, a surprise in either direction could have an outsized reaction. The consensus is picking the headline CPI rose 0.5% m/m and the core CPI rose 0.4% m/m, consistent with annual increases showing further moderation. The market will be zooming in on CPI services ex rents, given the current importance of this to the Fed’s reaction function.
Elsewhere, Japan and euro area GDP data and UK labour market data will be closely watched. Domestically, REINZ housing market and food price data this morning will be followed by the RBNZ survey of expectations, with the usual focus on the 2-year ahead inflation expectations figure.
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