European rates pushed higher after stronger inflation data, spilling over into US Treasuries, but with further confirmation of strong resistance for the 10-year rate to break above 4%. Net currency moves have been modest, but with notable NZD outperformance, with a break above 0.62. NZ rates were lower into month-end, after their recent grind higher.
Euro area inflation was in the spotlight overnight, with French and Spanish CPI inflation figures for February coming in stronger than expected, annual rates rising to 7.2% y/y and 6.1% respectively, both two-tenths higher than January. The data raised the chance of stronger German CPI data tonight and Euro area data the following night and prompted a further re-pricing higher of the expected ECB policy rate, which spilled over into higher rates across the curve.
The expected ECB policy target rate for the end of this year rose to as high as 4%, implying another 150bps of tightening, before settling back down to 3.9%. German bund yields rose to fresh decade-plus highs, before settling down, but still up 6-7bps for the day across the curve.
Breaking the stronger run of data through February to date, US economic data painted a weaker picture of the economy compared to expectations. US Conference Board consumer confidence was nearly 6pts weaker than expected at 102.9, driven entirely by the expectations component, which fell to a seven-month low. The goods trade balance widened slightly more than expected to $91.5b in January, while the Chicago PMI was on the soft side, falling about a point to 43.6 against expectations for a modest lift.
Higher European rates spilled over into the Treasuries market, with the 10-year rate making a fresh high of 3.98%. But, once again, resistance was met, sending rates back down, helped by the weaker consumer confidence report, and the 10-year rate is currently up only 2bps on the day at 3.93%.
In currency markets, overnight moves have been modest for most, but with a notable outperformance of the NZD, which rose 0.7% to break back up through 0.62. There’s no fundamental reason for the move and month-end flows could well be a factor.
GBP has also been well bid, making further progress to trade up through 1.21 overnight after the UK/EU agreement on the prickly Northern Ireland trade issue dubbed the “Windsor Framework”. UK PM Sunak headed to Belfast to sell the deal to Democratic Unionists, who were said to welcome progress but with concerns remaining. Sunak hinted that the deal might be signed even without the support of the Democratic Unionist party.
Other major currency moves overnight are less than 0.3% so NZD crosses are all higher, including NZD/AUD heading up through 0.9190. The NZD and AUD will end up the two of the worst performing major currencies for the month, alongside the yen, following the significant global rates selloff through February on fears of a tighter for longer global monetary policy cycle.
The S&P500 has been hovering in and out of positive territory in an uneventful session, on track to close February just over 2% weaker. The Euro Stoxx 600 index fell 0.3% to end the month up 1.7%, a good result considering the chunky lift in rates through the month.
In other overnight news, Canadian Q4 was weaker than expected at flat (1.6% annualised expected), reinforcing market expectations that the Bank of Canada won’t raise rates over the next couple of meetings, consistent with the “pause” guidance.
In domestic news, the ANZ business outlook survey showed further modest increases in activity indicators, but off a very low base. We’re hesitant to read too much into this survey or the next one which will be affected by cyclone Gabrielle. Inflation indicators eased a little but remained too high for comfort.
NZ rates fell yesterday, with NZGBs supported by month-end flows, particularly at the long end of the curve – down 8-9bps, with a 7bps fall at the short end. This was a decent outperformance against the swaps market, after swap-NZGB spreads had recently contracted to the lower end of their range of the past year on bond supply indigestion or expectations thereof. While the 2-year swap fell off its 14+-year high by 7bps to 5.37%, the 10-year swap rate fell by just 1bp to 4.70%. The grind higher in OIS rates towards the RBNZ’s assumed 5.5% peak showed a modest reversal, but at 5.44% is still there or thereabouts.
In the day ahead NZ building consents are followed by Australian Q4 GDP and monthly CPI data for January, the latter still expected to be travelling above 8%. The consensus for GDP is a 0.8% q/q expansion. China PMI data are expected to show further improvement in activity in February on the post -COVID economic re-opening. German CPI data and the US ISM manufacturing survey are the key global releases tonight.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.