US economic surprises for January keep coming, with the recent string of positive activity indicators now followed by surprising strength in PPI inflation. US Treasury yields pushed higher, not helped by hawkish comments by the Fed’s Mester, but have reversed somewhat since. The data pushed the USD higher overnight while US equities showed modest falls. The combination of a weaker Australian employment report and further thinking on the impact of ex-tropical cyclone Gabrielle drove a steeper NZ curve yesterday, with the market now fully on board with only a 50bps RBNZ hike next week.
US PPI data are usually considered second-tier when they are published after the CPI figures during the month, but they were too strong in January to ignore. Both the headline and core figures were both much stronger than expected, with upward revisions thrown in as well, the annual increase for the core figure coming in 0.5ppts higher than expected at 5.4% y/y. Services components were strong, as well as signs that producers lifted margins. The data played to the theme of inflation remaining too-high for comfort and the path towards to 2% could be slow.
Initial jobless claims also surprised on the wrong side that the market wants to see, at 194k last week, little changed from the prior week, suggesting that the labour market remains very tight.
Soon after the data were released, Cleveland Fed President Mester, a non-voter this year, showed off her hawkish credentials saying that she “saw a compelling case” for a larger 50bps hike at the last meeting and argued that the Fed could go back to 50bps moves, viz “it’s not always going to be, you know, 25…when the economy calls for it, we can move faster”. When asked about a possible pause in hikes, she commented that “nothing right now is leading me to think that I need to really be focused on that question at this point”.
The combination of the strong data and Mester’s comments sent US Treasuries and the USD higher, the 2-year and 10-year rates adding 8bps to highs of 4.68% and 3.87% respectively, before reversing course. The 2-year rate currently shows little net movement for the day, and the 10-year rate is up 3bps to 3.83%, and up 5bps from the NZ close. The Fed Funds market has consolidated recent moves, with two full 25bps hikes priced and a good chance of a third hike priced into the curve.
USD strength has also reversed as the market has settled, but has still shown broad-based net gains overnight. The commodity currencies have underperformed slightly, with NZD heading down towards 0.6230 but has recovered to 0.6275. The AUD fell to 0.6840 but is back trading just around 0.69. NZD crosses are down slightly from the NZ close.
Yesterday, Australia’s employment report was weaker than expected, with employment falling 11.5k, down for a second straight month in January, and the unemployment rate up 2 ticks to 3.7%. The weakness looks overstated with seasonal adjustment issues a likely significant factor, but the report triggered lower Australian rates and a weaker AUD. The kneejerk AUD reaction soon reversed but less so for the rates market.
Lower Australian rates spilled over into the domestic market. The 2-year swap rate closed the day down 5bps to 5.15%. Longer term rates fell from levels that had been earlier pushed higher from the force of higher US rates and 5-year swap closed the day flat and 10-year swap up 3bps, so some notable curve steepening there.
The mulling over the impact of ex-tropical cyclone Gabrielle looked to be a factor in the steepening trade, with the market more convinced that a 50bps hike next week is more appropriate under the circumstances rather than a jumbo 75bps move, the OIS market for that meeting closing the day exactly at 4.75%. The higher fiscal costs for the rebuilding of infrastructure, likely to be in the billions, adds to the pressure on bond supply. While there was strong demand for NZGBs at the weekly tender, there was some modest underperformance of NZGBs versus swap. The 10-year NZGB closed the day up 5bps at 4.34%.
The calendar in the day ahead is light, with RBA Governor Lowe in front of lawmakers again, more Fed speakers and UK retail sales data.
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