Stronger than expected China PMIs propel China-sensitive assets higher. US ISM Manufacturing PMI adds to stick inflation concerns. 10yr trades 4.00%

By Stuart Talman, XE currency strategist

A busy 24 hours has delivered a deluge of market moving data, some releases providing encouragement to the soft-landing camp, others adding to the higher for longer narrative regarding central bank tightening.
 
The net effect: the US dollar is weaker, yet US bond yields are higher, US equities have opened softer, but are improving and the New Zealand dollar is the standout performer, up over one-and-a-quarter percent, sitting atop the G10 leader board.  
 
Soft Aussie data (GDP and CPI), strong China PMIs, an upside German CPI beat, a contractionary ISM Manufacturing PMI has delivered mixed signals for the market…..its proving hard to determine if we’re seeing risk off, or risk on flows.
 
We’ll start with the most recent data release first – ISM Manufacturing.
 
For the fourth consecutive month, the US manufacturing sector has remained in contractionary territory (a sub-50.0 reading) confirming that factories across the US are experiencing recessionary-like conditions. Printing at 47.7 the headline number fell short of the consensus forecast of 48.0, bucking the trend of recent upside data surprises.
 
Within the official PMI reading there are sub-gauges that report on various components of the manufacturing industry. These include employment, new orders, production, order backlog, new export, imports and prices paid.
 
It’s the prices paid component that has captured the most attention, yielding a 51.1 reading, up from 44.5 the month prior and easily surpassing the 45.1 consensus forecast. This adds to worries that sticky inflation will warrant further rate hikes, a higher peak rate and no pivot any time soon, aka higher for longer.
 
Bond yields surged in response, the US 10-year yield trading through 4% for the first time since November whilst Fed fund futures price a higher terminal rate – near 5.50%. Heading into 2023, market pricing was calling for a peak rate closer to 5%.
 
Yields have eased off their highs through the New York morning helping US equities to rebound off session lows and resume the New Zealand dollar’s ascent which began in earnest during the Asian afternoon.
 
So, why is the Kiwi the standout performer?
 
First and foremost – stronger than expected manufacturing and services PMIs for the Chinese economy, and secondly, weaker than expected GDP and monthly CPI data for the Australian economy.
 
The Aussie has therefore failed to rally to the same magnitude as the Kiwi, logging a noticeably smaller gain of around 0.50%.
 
Those who doubt the validity of China data will view the latest reads on the economy through a cynical lens. Manufacturing activity climbed at its fastest pace in eight months, the PMI easily exceeding the consensus forecast of 50.5, printing at 52.6. The Caixin Manufacturing PMI, which covers smaller businesses, rocketed to its highest level since April 2012.
 
The services PMI beat was greater still: 56.3 vs an expected 49.7, the second consecutive month of expansionary activity following three dismal lock-down affected months.
 
The data signals a strong rebound for the Chinese economy, justifying Xe’s decision to abruptly end the covid-zero policy on December.
 
Its perfect timing for impressive data to drop, days before China’s annual Two Sessions meeting is held over the weekend. Bringing together the National People’s Congress and the National Committee of the Chinese People’s Political Consultative Conference, the two-day event set the tone for the economy, policy and geopolitics for the year ahead.
 
In response to the PMIs, the Kiwi ripped higher, climbing from below 0.6170 through 0.6270 in one-way price action – the bulls firmly in control. The ascent stalled near old support which now forms near-term resistance, NZDUSD falling back to within a couple of pips of 0.6220.
 
Benefitting from US equities recovering from early session lows, the Kiwi traded back through 0.6260 with a few hours of US trade remaining.

The other talking point from Wednesday’s local session was poor 4Q GDP and monthly CPI data for the Australian economy.
 
Expanding at a QoQ rate of 0.5% during the last quarter of 2022, the result was below the consensus forecast of 0.8%. Whilst it is the fifth consecutive quarter of economic growth it is the slowest pace during this period.
 
The monthly consumer price index (CPI) increased at an annualised rate of 7.4% (vs 8.0% expected) in January, dramatically slowing from the 8.4% cycle peak in December. The monthly indicator is more volatile than the long running quarterly indicator, therefore not as critical an input for RBA policy.
 
Nonetheless, the weak CPI and GDP prints in addition to consumer confidence at recessionary levels, slower the expected wages growth, flat retail sales (in recent months) and two softer jobs reports, raises questions over the RBA’s recent hawkishness, causing the market to re-think the RBA’s expected path over the next few meetings.
 
Currently at 3.35%, the RBA may be delivering its last 25bps hike of the cycle at its 07 March meeting rather than additional hikes at the April and May meetings.
 
The rate sensitive antipodean cross rocketed higher, NZDAUD smashing through 0.9250 to log Wednesday’s high at 0.9260. From its 20 February low, the Kiwi has clawed back close to 3% against the Aussie.
 
The next upside test for NZDAUD comes via the 50% Fib retracement of the December to February sell-off, located at 0.9285. Above here, 0.9310 is a key resistance level, price action rapidly tipping over from this level in late January.
 
Expectations are for the pair to top out close to these levels.
 
Looking to the day ahead, the headline event is the latest read on eurozone inflation which follows the country level reports, earlier in the week. Germany joined France, Spain and other EU members, releasing stronger than expected preliminary inflation reports for February.
 
Headline eurozone inflation is expected to further ease from 8.6% to 8.2% having peaked at 10.6% in October. The core reading is expected to remain at 5.3%, the cycle’s current peak.
 
Terminal rate expectations for the ECB’s primary policy rate have risen above 4%, supporting the euro against its major peers – NZDEUR has fallen from a January peak near 0.60 through 0.58 at this week’s lows. The pair improved back to 0.5880 during overnight trade.
 
A stronger than expected eurozone CPI report will likely create downside pressure for the Kiwi and other risk-sensitive assets.
 
We’re not convinced the Kiwi can add to its two-day rally and look for NZDUSD resistance at 0.6270 to hold.  

Stuart Talman is Director of Sales at XE. You can contact him here.