USD broadly stronger; NZD, AUD and JPY fall over 1% Friday night; NZD closes at 0.6165, below key support of 0.62 and below 200-day moving average. Strong US PCE deflators extend global rates sell-off

Friday’s price action continued along the lines of what we have seen through most of February, with higher rates, weaker equities and a stronger USD, not helped by much stronger than expected US PCE deflators. The higher global rates backdrop saw the yen underperform, while the risk-off mood hit the NZD and AUD, both falling more than 1% Friday night, and both closing below their 200-day moving averages.

Last week ended on a sour note. There were evidently nerves ahead of the US personal income and spending report which contains data on the PCE deflators, with global rates and the USD pushing higher and equity futures pushing lower ahead of the release.  Those nerves were vindicated when the data showed a 0.6% m/m lift in the core PCE deflator – considered the Fed’s preferred measure of inflation for monetary policy purposes – and the annual increase at 4.7%, a chunky four-tenths ahead of market expectations as the data showed upward revisions. The breakdown showed strong inflation pressure in the key services sector.

Real personal spending rose 1.1% m/m, showing unsurprising strength following the boomer of a retail sales report earlier in the month. New home sales jumped over 7% m/m in January to their highest level in nearly a year, one of the few housing market indicators showing any life, and the final reading of consumer sentiment was revised a little higher. So strong data all round.

These releases encouraged a further re-pricing of US monetary policy expectations, with 82bps of hikes prices over coming months, suggesting three full 25bps hikes and a chance of a fourth, early in the second half. Other new milestones were reached on short end rates, with the 2-year Treasury yield trading as high as 4.84% a level not seen since 2007, closing the day up 12bps at 4.81%, while Germany’s 2-year rate rose above 3% for the first time since 2008, closing up 12bps to 3.03%. The US 10-year rate continued to show some resistance around the 3.97% mark and ended the day up 7bps at 3.94%.

Fed speakers remained forthrightly hawkish. St Louis Fed President Bullard still remains at the hawkish end of the FOMC and clearly favours 50bps clips saying, “move quickly now, re-establish credibility now”. Boston Fed President Collins anticipated “further rate increases to reach a sufficiently restrictive level, and then holding there for some, perhaps extended, time”. Cleveland Fed President Mester speaking after the data and asked whether she favoured stepping up to a 50bps hike at the next meeting said “where we’re going is more important than what we tactically do at any one meeting”.

Not helping the mood of the market, a research paper co-authored by some Wall Street economists and academics showed simulated models predicting that the Fed Funds rate would peak at either 5.6%, 6% or 6.5% in the second half of this year and suggested “our analysis casts doubt on the ability of the Fed to engineer a soft landing in which inflation returns to the 2% target by the end of 2025 without a mild recession.”

The higher rates backdrop continued to negatively impact the equity market, with the S&P500 closing down just over 1%, taking the decline to 2.7% for the holiday-shortened-week, the worst weekly performance for the year to date. Commodity markets aren’t liking the higher rates backdrop either, with Bloomberg’s commodity price index down to its lowest level in over a year, the recent fall exacerbated by USD strength.

The USD was broadly stronger on Friday, with dollar indices approaching, but not quite matching the early January high. EUR closed just under 1.0550, with traders eyeing support at 1.05. GBP closed just under 1.1950.  The NZD and AUD both fell by over 1% Friday night.  The key 0.62 support for the NZD was broken, as was the 200-day moving average of 0.6184, to close the week at 0.6165. The AUD also closed below its 200-day moving average, ending the week a tic over 0.6725.

The higher global rates backdrop saw a weaker yen and resistance of 135 for USD/JPY broken, for a weekly close around 136.50. Sentiment for the yen wasn’t helped by BoJ Governor nominee Ueda’s comments as he faced questioning at Parliament.  Disappointingly, he seemed to parrot the same soundbites as Governor Kuroda.  Charitably, perhaps he just wanted to play a straight bat before he gets his feet under the desk. He noted that recent higher inflation was due to “cost-push” factors and not strong demand and he saw inflation falling from here, adding that current BoJ policy is appropriate. Earlier in the day, Japan CPI inflation continued to push up to fresh multi-decade highs, with the headline rate at 4.3% y/y and the core rate that excludes fresh food and energy at 3.2%.

In other economic news, German GDP for Q4 was revised two-tenths lower to minus 0.4% in Q4. Another contraction in Q1, as widely anticipated, would pass one definition of economic recession, although survey data showed improving momentum which would imply only a shallow recession.

In domestic news, Fonterra lowered its 22/23 milk price midpoint forecast by 50 cents to $8.50, no surprise as it is in line with futures pricing and our own projection of $8.60. Fonterra noted the soft global economic outlook and the particularly softer demand for whole milk powder from Greater China.

The NZ rates market had a choppy session on Friday as the market repositions itself after the RBNZ’s MPS and the volatile global backdrop. The net result was little change in NZGB yields, apart from keen interest in the ultra-long bonds that saw the 20/30 yields down 4/5 bps on the day. Swaps traded a wide range for the day, with the 10-year rate ending 1bp lower as the market flattened, with the 2-year rate up 4bp to 5.39%, just shy of the closing high at the end of December. The bias will be for slightly higher rates on the open, following the offshore moves Friday night, with the Australian 10-year bond future up 3bps from the NZ close.

In the day ahead, NZ retail sales data for Q4 are released, too dated and volatile to hold too much interest, but for the record the consensus is picking a modest increase of 0.2%, amidst a wide range of minus 1.7% to plus 0.4%. Only second tier global data are released tonight, including US durable goods orders.

The calendar picks up for the week ahead, with the key domestic release being the ANZ’s business outlook survey. Globally, China PMI, Australian GDP, US ISM manufacturing and services indices and Euro area CPI data are the key releases, all of which have the potential to move the market.