Strong Euro area CPI data and strong US labour market data pave the way for further upside pressure in global rates. US 10-year rate pushes up to 4.09%. Equity markets not too fussed by higher rates

Global rates have continued to push higher, not helped by strong Euro area inflation data and a revision that saw higher US unit labour cost inflation alongside still-low jobless claims figures. Equity markets remain surprisingly resilient against the backdrop of higher rates. The USD has been broadly well-supported, seeing the NZD retrace back towards 0.62.

In economic news overnight, US initial jobless claims remained low at 190k, although the warm winter has helped prevent a take-off of that figure – the sky-rocketing Challenger job layoffs series forewarns that the labour market has turned and, given the usual lags, initial jobless claims can soon be expected to head higher as well. Furthermore, a revision of dated data would normally be ignored by the market, but it was hard to ignore the downward revision to Q4 productivity that meant unit labour costs were revised up significantly to show an annualised increase of 3.2%, double the expected figure and giving oxygen to the narrative that high inflation will remain sticky.

With resistance at 4% broken, it hasn’t taken much for the US 10-year Treasury rate to climb higher, with a 4.09% peak overnight after the stronger labour market data and the 30-year Treasury joining the move in breaking above 4% as well. The short end of the curve has moved less, with Fed Fund futures still showing about a cumulative 90pbs of hikes ahead, so three full 25bps hikes and a better than even chance of a fourth hike, the market now well prepared for a hawkish Fed update at the next meeting later this month. With a curve steepening bias, the 2-year rate is up 4bps while the 10-year rate up 9bps on the day.

As forewarned by stronger country data, Euro area CPI figures were stronger than expected, with the headline rate dipping down to only 8.5% on less energy inflation while the key core rate accelerated three-tenths to 5.6% y/y. The data cements in a 50bps lift in the policy rates at the mid-March meeting and a strong chance of keeping the pace at 50bps a clip thereafter. The market was well prepared for the higher CPI print, which contained the rates market reaction, with the peak ECB deposit rate continuing to be priced near 4%, and little net change in Germany’s 2-year rate for the day, while the 4bps lift in the 10-year rate to 2.75% reflected some spillover from higher Treasury yields.

Equity markets still don’t seem too worried by the higher rates backdrop, with the Euro Stoxx 600 index closing 0.5% higher and the S&P500 currently showing only a small fall.

The USD remains well supported, with the gain seen during the NZ trading session extended overnight. So the NZD has tracked lower, from the 0.6260 mark seen 24 hours ago to test 0.62 overnight and currently near that mark. Most NZD crosses are flat overnight and with a small net fall over 24 hours.  The AUD has fallen towards 0.67 and NZD/AUD has tracked sideways just under the 0.9250 mark. EUR and GBP have slipped below 1.06 and 1.1950 respectively. USD/JPY tested the 137 level again.

Yesterday, NZ rates opened higher across the curve on global forces that had sent the US 10-year rate above 4%. Ahead of the latest bond tender, rates lifted further but in the event bid-cover was strong and all three lines cleared below pre-tender mids. After rates nudged lower, they were lifting again into the close. The net change for the day was a 8-9bps lift in most NZGB yields, with a smaller 4bps lift in the 2051s as it continues to remain in favour. Swap yields were up 6-8bps across the curve. The lift in global rates overnight will see further upward pressure on NZ rates at the open, with the Australian 10-year bond future up about 8bps in yield terms since the NZ close.

In the day ahead the ANZ consumer confidence survey is released and it will be interesting to see if confidence recovered further from the improvement in January, after December’s record low. Tokyo CPI data will show a sharp drop in headline inflation as energy subsidies kick in so focus will turn to the core measure excluding fresh food and energy, expected to tick higher to 3.1% y/y. The key release tonight is the ISM services index which has been a market mover over the past two readings after a sharp move down then up.