Trading conditions have been wild, but there are hints that the worst of the volatility might be over, with US banking stocks recovering strongly. This has seen the US 2-year rate rise significantly, and with another nudge higher after US CPI data showed still too-high inflation for comfort. The US 10-year rate is up modestly from the NZ close. Currency movements have been well contained, with the NZD settling into a 0.62-0.6250 zone.
Some calm has been restored after another wild day of trading as investors considered how bad the US banking sector woes could get. After we went to print yesterday, the US 2-year Treasury rate ended the US session at 3.97%, down 61bps for the day, the largest daily change since 1982. After a steady lift through the NZ trading session towards 4.2%, things got wild again last night, with dysfunctional trading conditions seeing it whip around a 40bps trading range to a fresh low of 3.82%, before conditions calmed down into the European trading session.
Trading through the US session has been fairly uneventful, with the market taking a view that the worst of the “crisis” has now passed – the Fed’s introduction of the new Bank Term Funding Programme on Monday so far doing the job in containing the fallout from the two bank failures. Most of the 22 banks in the KBW banking index show strong gains – the two worst banks hit yesterday up 30-50%. And the KBW regional banking index which covers the smaller regional banks shows a similar pattern. The S&P500 shows a broadly based recovery, the index up over 1% and all sectors in positive territory.
The focus on the health of the US banking system has overshadowed the flow of economic data, but there was still keen interest in the latest US CPI report. In the event, the data were close to market expectations, with headline and core CPI figures for February at 0.4% and 0.5% m/m respectively, the latter ticking up on rounding, with a 0.45% print on two decimal places. Annual inflation pushed lower to 6.0% for the headline and 5.5% for the core. The breakdown showed still uncomfortably high inflation pressure for core services inflation ex housing and energy, up 0.5% m/m, the largest rise since September. Rents continue to increase strongly reflecting the measure representing the “stock” of housing, even as the “flow” of new rental agreements show little inflation, but this will take a long time to filter through the CPI data.
The data provide fodder for the Fed to continue hiking rates. The significant tightening in financial conditions in the past week and likely tightening in lending standards to come, as banks build a cash buffer, will be doing some of the tightening work for the Fed, ruling out the need to upscale to a 50bps hike, so the decision will likely come down to a pause or 25bps hike – the latter the most likely if market conditions can settle over the coming week with no more shocks coming out of the banking sector, while a pause easily justified on any further market turbulence.
Fed funds futures now price in a 17bps hike, consistent with a 25bps hike but a decent chance of a pause and certainly no more than one further 25bps hike (34bps cumulatively priced from now to the peak). Beyond May the market sees a rising chance of easier policy, with 50bps of easing priced by year-end.
Ahead of the CPI release, the US 2-year rate was already back up to 4.24% on the calmer market backdrop and post CPI it pushed up as high as 4.39%, currently back around 4.3%. After reaching a low of 3.46% last night when the market was dysfunctional, the 10-year rate has been as high as 3.68% and currently sits just over 3.6%.
Currency markets have showed a distinct lack of volatility by comparison to the rates market. The higher rates backdrop and less demand from safe-haven flow have seen the yen underperform, with USD/JPY pushing back above 134. The NZD has been contained within a 0.62-0.6250 zone over the past 24 hours and currently sits mid-range. The AUD is at 0.6670, up modestly overnight but little changed from this time yesterday. NZD crosses have been range-bound apart from a push higher in NZD/JPY to 83.7.
In other news, UK labour market data showed signs of slower wages inflation for the first time in more than a year, with average earnings ex bonuses nudging down 2 ticks to 6.5% y/y, while the unemployment rate remained unchanged at 3.7% against expectations for a small lift. The labour market remains too tight for comfort and the bias remains for further BoE rate hikes. Market pricing currently slightly favours a 25bps hike over a pause at the meeting next week.
REINZ housing market data showed depressed sales volumes and lower prices. While the house price index showed a rare lift of 0.1% m/m in February, this was masked by seasonal forces. Our seasonally adjusted estimates suggested a price fall of 1.5% for the month, taking the peak-to-trough fall to over 16% or 25% in real terms, when deflated by the CPI.
Domestic rates showed a short end-led plunge in rates, consistent with the pattern seen globally, but the NZ market lagging the moves on a cross market basis. Short-end NZGBs were down over 20bps, while the ultra-long bonds were down just 5bps. The 2-year swap rate plunged 27bps to 5.04% against a 12bps fall in the 10-year rate to 4.36%. The OIS market showed a significant paring of monetary policy rate hike expectations. Pricing for the April meeting closed at 4.94%, consistent with the market entertaining the possibility of the RBNZ pausing at the next meeting, but with a still reasonable chance of a 25bps hike. And the peak OCR rate was priced at 5.14%, well down from the 5.5+% level seen last week.
The economic calendar is playing second fiddle to the market concerns about the US banking sector but for the record, NZ current account data released today will be ugly, with the annual deficit expected to widen to 8.5% of GDP. China monthly activity data, combining January/February will be released. Tonight sees the UK Budget and, in the US, PPI, retail sales and the NAHB housing market index will be released. Retail sales should be weaker following January’s strength.
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