There has been little news overnight and market movements have been modest. US equities are slightly higher, US Treasury yields are lower after their recent big move higher. The NZD has been flat overnight after a small lift after the RBNZ delivered the widely expected 50bps hike. Market reaction to the MPS has been muted overall.
Markets have been quiet overnight with some anticipation of the minutes from the FOMC’s early-February meeting due at 8am. Since that meeting the run of data has been stronger than expected, financial conditions have notably tightened, and we have heard ad nauseum from Fed speakers about their views on the rates outlook. It’s hard to see the minutes adding much more information, but that won’t necessarily prevent a knee-jerk reaction when they are released.
The only news that caught our eye overnight were reports on Japanese wage negotiations. Outgoing BoJ Governor Kuroda might be getting his wish for higher wage inflation, with Toyota and Honda agreeing to union demands for higher wages, the former not disclosing the amount but noting it was the largest hike in two decades and Honda disclosing a 5% lift in wages, the largest increase in base pay in three decades. This will put pressure on other companies to do the same during upcoming wage negotiations. Kuroda has previously noted that he wants to see wage inflation of at least 3% before ending the Bank’s ultra-easy policy stance.
Over the past couple of weeks, Japan’s 10-year rate has been pinned at the very top of the allowable range at 0.50%, with only active BoJ buying preventing a sharp move higher. Through February, the yen has trended lower against the backdrop of rising global rates and USD strength, with some USD/JPY resistance around the 135 mark.
In economic news, Germany’s IFO business survey showed a fifth consecutive monthly improvement in expectations, from a soft base, rising a couple of points to 88.5. Yesterday, the Australian wage price index rose 0.8% q/q and 3.3% y/y, 0.2pps shy of market and RBA expectations. The data suggest no evidence yet of a developing wage-price spiral, but on its own won’t prevent the RBA from hiking rates further.
The S&P500 is currently up slightly after yesterday’s largest daily fall for the year of 2%. The US 10-year rate traded up to a fresh three-month high slightly under 3.97% just before midnight, but has since pushed lower, currently at 3.90%, a few basis points down from the NZ close. It is too early to be certain that after a brutal run higher through February a turning point in that rate has been reached, but the overnight turnaround might hint of some resistance just under the 4% mark.
In currency markets, overnight moves have been modest. The NZD has been trading more or less in a 0.6210-0.6250 trading range since the RBNZ’s MPS (see below), so an immaterial reaction. Some NZD support is more evident in the crosses. The AUD lost ground after the weaker wages print and hasn’t recovered, currently trading around 0.6820 and with NZD/AUD stronger at 0.9140. EUR and GBP performances have also been lacklustre, and NZD crosses against those are modestly higher, while NZD/JPY is flat around 84.
The RBNZ raised the OCR by 50bps to 4.75% as widely anticipated and there was only a minor tweak to the projected track, with the peak still assumed to be 5.5% but taking slightly longer to get there. The RBNZ will rightly try to look-through the near-term inflationary impact of Cyclone Gabrielle and suggested that it didn’t materially alter the outlook for monetary policy. We detected a slight softening of tone through the minutes compared to November, reflecting the fact that policy was now more overtly contractionary, the long lags of policy transmission to the economy and that domestic demand and inflation were now heading in the desired direction.
Market reaction was muted by the lack of genuine surprise in the announcement. Rates closed the day higher across the curve, but much of that reflected the pre-MPS move following the global rates market selloff the prior night and even some of the post-MPS move we saw could be traced to lower rates in Australia as the market digested the lower wages print. The historical record will show a 9bps lift in the 2-year swap rate for the day, but mostly a reflection of global forces. The 5-year rate closed up 11bps and the 10-year rate was up 9bps. The OIS market continues its reluctance to price in an OCR as high as the RBNZ’s 5.5% projection, seeing some chance that the rate won’t need to get that high. BNZ’s peak OCR projection is pitched at 5.25%, consistent with two 25bps hikes over the April and May meetings, before a long period of rate stability at that higher level ensues.
NZGBs showed a lift of 9-11bps with a steepening bias. Yesterday morning the NZDM announced the syndication of a new 2030 nominal bond in March, an earlier schedule than expected. Ahead of this increase in bond supply, the pressure will be on NZGBs to underperform swap.
After the FOMC minutes are released, the economic calendar remains light with the second estimate of US Q4 GDP and initial jobless claims released tonight.
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