Market conditions calm (again); equities push higher, US Treasuries well contained. German inflation falls but core inflation in Euro area too strong for comfort

For a third successive day, market conditions are calm, as perceived financial stability risks continue to recede. Equity markets are higher and US Treasuries show little net movement, while European rates are higher not helped by stronger than expected German inflation data. The USD is broadly weaker, seeing the NZD back up around 0.6250 and the AUD at 0.67.

The last few days have been marked by no new bank blow-ups seeing calmer market conditions compared to the turmoil of the past few weeks. Still, underneath the hood some concerns remain lurking, and the Financials sector is acting as drag on the S&P500 which currently shows a modest gain.  Almost all banks are weaker in the KBW bank index and the KBW regional banking index. The Euro Stoxx 600 index closed up 1%.

German CPI inflation fell significantly to 7.8% y/y in March from 9.3%, as a big lift in gas prices last year dropped out of the annual calculation, but this was a smaller drop than expected to the tune of 0.3 percentage points. No core figures were released, but Bloomberg estimates that inflation rose from 5.4% to 5.7%. In Spain, the drop in headline inflation was even larger, from 6.0% to 3.1%, but the core figure only nudged down 0.1pp to 7.5%.

At this juncture, the ECB is more focused on the core measures, and the message is that inflation remains uncomfortably high. Euro area CPI data are released tonight and are expected to show core inflation rising slightly to 5.7% y/y. The market moved to price in tighter ECB policy, with another 10bps of hikes added to the path for rates this year. The short-end led lift in European rates saw Germany’s 2-year rate up 9bps to 2.72% and the 10-year rate up 4bps to 2.37%.

US Initial jobless claims rose 7k to 198k last week. Worker Adjustment and Retraining Notices (WARN) oblige employers with more than 100 full-time workers to provide written notice to the state and workers at least 60-90 days ahead of planned plant closings and mass layoffs. They, alongside the more widely followed Challenger job layoff series, have been picking up strongly over recent months and portend a lift in unemployment claims and unemployment rate.

In Fed speak this morning, Richmond Fed President Barkin said he saw the possible range of outcomes going forward “as pretty wide…if inflation persists, we can react by raising rates further”. He added “if I am wrong about the pricing dynamics at play, or about credit conditions, then we can respond appropriately”. Boston Fed President Collins sounded more hawkish than Barkin, saying “inflation remains too high, and recent indicators reinforce my view that there is more work to do”. She added that tighter bank lending standards “may partially offset the need for additional rate increases”.

Against a backdrop of higher European rates, US Treasury yields have been well contained, with little net movement in rates, with the 2-year rate currently at 4.09% and the 10-year rate at 3.54%. The USD is broadly weaker, with higher European yields supporting EUR and GBP. EUR traded up through 1.09 and currently sits near that level. GBP is running up towards a two-month high, just under 1.24. The NZD and AUD show modest gains and have returned to the 0.6250 mark and 0.67 mark respectively. NZD/AUD traded below 0.93 yesterday, but is back to 0.9330. The yen has been on the softer side of the ledger and NZD/JPY has pushed up towards 83.

In domestic data, the ANZ business outlook survey showed insignificant movements in activity and inflation indicators from the previous survey, with a soggy activity backdrop and uncomfortably high inflation remaining the story. NZ dwelling consents showed a significant downturn underway, with chunky falls over recent months and being down 25% over the last five months to February in seasonally adjusted terms. The fall has been so rapid that that trend for standalone houses is now at a 10-year low, portending a significant contraction in residential building activity ahead.

Domestic rates were higher across the curve.  NZGBs pushed higher ahead of the tender which then attracted solid bidding, particularly for the longer-dated bonds. By the end of the day, some decent curve flattening had occurred, with short rates up 9-11bps, the 10-year rate up 5bps to 4.20% and no net change for the ultra-long 2051 bond.  Swap rates were up 7-9bps across the curve. OIS pricing shows expectations for the RBNZ meeting next week solidifying towards a 25bps hike.

The economic calendar is action-packed over the next 24 hours. NZ consumer confidence is likely to remain depressed. China PMI data are expected to weaken from the initial post-COVID recovery. Focus for euro area CPI data will be on the core figure, expected to nudge up further to 5.7% y/y. In the US, the key release will be the core PCE deflator, where a 0.4% m/m lift would keep the annual change at 4.7% y/y.