Hawkish ECB comments send European rates and euro higher. US 10-year yield back up at 3.96% after falling just below 3.9%. NZD rates lower on global forces

It has been a typically quiet start to the week. There has been some notable action in the rates market and euro after some hawkish comments by the ECB’s most hawkish GC member. The NZD and AUD are weaker following the weekend news of China’s underwhelming 5% growth target for this year. NZ rates saw a decent fall yesterday on global forces.

Ahead of the ECB meeting next week, where a 50bps hike can be taken as a given, the focus is on the scale of hikes thereafter. Yesterday we noted Belgium’s Wunsch comments that the market’s bet for a 4% rate peak could prove accurate. Overnight, the most hawkish GC member, Austria’s Holzmann suggested an additional three 50bps hikes after next week, for a 4.5% peak. Meanwhile at the other end of the spectrum, Chief Economist Lane suggested a data-dependent meeting-by-meeting approach and that it was important to measure the ECB’s cumulative tightening so far. Furthermore, the Portuguese GC member Centeno highlighted that headline inflation was undershooting the ECB’s forecasts and officials should not rush to conclusions on other gauges, like the higher core inflation data.

Holzmann’s hawkish guidance has resonated more with the market than the dovish commentary, sending European yields higher, adding about another 8-9bps to the expected peak in the Deposit Rate this year to a cumulative 159bps, implying a 4% rate fully priced and some chance of 4.25%. Germany’s 2-year rate is up 10bps on the day, and the 10-year rate up 3bps.

Higher European rates have spilled over into US Treasuries. The 10-year Treasury was heading lower through the Asian session and early European trading, before reversing course.  After falling just below 3.9%, the rate has climbed back up to 3.96%, a few bps higher than the NZ close and up 1bp from Friday’s close. Some nerves about what Fed Chair Powell might say tonight when he faces lawmakers might be contributing to the cautious tone in the bond market and it will be interesting to see whether the sub-4% 10-year rate level can be sustained after the temporary breach last week.

Higher European rates have supported a higher euro, up 0.4% from last week’s close to approach 1.07. GBP has been left behind, flat at 1.2035.  The NZD and AUD have underperformed following the weekend news of China setting a growth target of just 5% this year, below the current consensus and an easy beat as the economy recovers from the zero-COVID policy. The NZD currently sits just under 0.62 and the AUD at 0.6730. NZD/AUD is flat at 0.9190 and NZD crosses are modestly weaker.

Following Friday’s strong gain as long-term Treasuries fell back below 4%, US equities have spent the entire session in positive territory and the S&P500 is currently up just over ½%.

In economic news, the NY Fed’s Global Supply Chain Pressure index fell below normal in February for the first time in 3½-years, reflecting less shipping congestion, an easing of parts shortages, shorter delivery times and weaker consumer demand. The data are consistent with falling inflationary pressure for goods.  However, the data say nothing about the battle against inflation for central banks focused on the services sector of the economy, where inflation remains far too high for comfort.

Domestically, the volume of building work put in place contracted by 1.6% q/q in Q4, weaker than expected, creating some downside risk to our current 0.3% GDP estimate and adding to the chance of a downside miss to the RBNZ’s 0.7% estimate. More partial indicators of GDP will be released later in the week that will help firm up estimates heading into next week’s release.

NZ rates showed notable falls yesterday, with a tailwind from global forces, driven by the long end of the curve. Swaps were down 2bps for the 2-year rate and 10bps for the 10-year rate, so a clear flattening bias. NZGB yields were down 3-8bps across the curve, with longer end rates underperforming against a larger fall in Australian 10-year yields. NZDM launched the syndication of the new 2030 nominal bond, looking to raise between $3-5billion, with initial price guidance of 2-5bps above the 2029 bond. By the close, demand had already exceeded the top end of the range.

In the day ahead, the RBA is universally expected to raise the cash rate by 25bps to 3.6% and this is well priced. Focus will be on the last paragraph and how the Bank describes the path for rate hikes ahead. When looking at cross country rates, Australia continues to look out of line, with too little priced against its dollar-bloc brethren and projected hikes barely higher than those priced for the ECB. There will be as much interest in what Governor Lowe says in his speech tomorrow. The key focus tonight will be on Fed Chair Powell’s answers as he faces questions from the Senate Banking Panel. The market is well priced for a more hawkish tone than that conveyed early February, given the run of positive data since then.