US Treasury yields fell, led by the short end, after the much softer than expected US labour market JOLTs report. This dragged the USD down but commodity currencies have underperformed the move, the AUD much weaker after the RBA opted for a pause in rates. US equities are weaker, led by economically sensitive sectors. NZ’s QSBO will have comforted the RBNZ a little ahead of another tightening today, with the market well priced for a 25bps hike.
The key marking moving news overnight was the US JOLTS report showing a plunge of 632k in job openings in February to 9.9m, from the downwardly revised figure in January, a significant miss relative to expectations. This took the job openings to unemployed ratio, one of Fed Chair Powell’s favourite indicators, to 1.67, the lowest since November 2021. The quits rate (voluntary job leavers as a ratio of employment) edged up to 2.6%, albeit still down from its peak of 3.0%. The data provided further evidence of easier labour market conditions, led by demand for labour.
The weaker report sent US Treasury yields lower, led by the short-end of the curve, with the 2-year rate down 12bps on the day to 3.84% and the 10-year rate down 6bps to 3.35%. Pricing for the next Fed meeting in May edged down to a near 50/50 bet on a 25bps hike. Focus will turn to Friday’s key employment report, where the consensus to picking a further moderation in non-farm payrolls growth to 240k.
EUR, GBP and JPY were all well supported after the JOLTs report. European rates haven’t fallen as much as US rates, so the USD has lost some of its interest rate support. EUR is up to 1.0950, while GBP broke above 1.25 for the first time since June last year. The JPY remains sensitive to US rates and USD/JPY has fallen to 131.70.
Commodity currencies have lagged those moves, particularly the AUD, after the RBA opted to pause on its rate hike cycle – broadly in line with the market and consensus view – but many still thought another 25bps hike was possible at this meeting. There was an incremental toning down of the tightening bias, with the Bank noting a less definitive “some further tightening of monetary policy may well be needed”. Whether the 3.6% level represents the peak in the policy rate will depend on the incoming dataflow. With a peak in rates at a much lower level than other dollar-bloc countries and with Australian inflation pressures just as high, the Bank would be risking a more persistent inflation backdrop.
Australian rates fell after the decision and then fully retraced that move, before lower Treasury rates sent them lower again. Since the decision, which coincided with the NZ close, the Australian 3-year bond future is down 10bps in yield terms and the 10-year rate is down 5bps. The AUD has steadily fallen since the decision, making it the worst performing major since this time yesterday, and currently at 0.6740.
By contrast, the NZD has been relatively flat, hovering around 0.63, within an approximate 0.6275-0.6315 range. NZD/AUD recovered the previous day’s loss and is back trading at 0.9340. Apart from a flat NZD/CAD, the NZD is weaker on the other key crosses.
JP Morgan CEO Dimon’s annual letter to shareholders included comments on the recent banking turmoil, saying that the episode is “not yet over” and will be felt for years. However, in comparing the current situation to 2008, he said the turmoil “involves far fewer financial players and fewer issues that need to be resolved”. While he noted that bank management played a part, there was also dig at regulators, saying “this wasn’t the finest hour for many players”. After a small kneejerk lift in the S&P500 after the JOLTS report (bad news is good news), the index has pushed lower by about 0.7%, led by economically sensitive sectors. Financials are also dragging the chain (again), with the KBW bank index currently down 2.6% with all 22 stocks lower.
The GDT dairy auction showed ongoing downward pressure on pricing, with the index down 4.7%, the seventh fall over the past eight auctions and down around 38% on a year ago. Fonterra has been actively revising down its milk payout to farmers, the last one earlier in the week, where it noted softer than expected demand for whole milk powder from China and the spring flush on Northern Hemisphere milk production. The hit to incomes is beginning to mount.
The key message from NZIER’s QSBO was that supply conditions have substantially eased. Notably the difficulty finding labour series fell significantly and demand now outstrips labour shortages as the major constraint to higher production. Pricing indicators eased but remain uncomfortably high. Still, the RBNZ should be pleased with the survey results as a sign that domestic demand and inflation pressures are heading in the right direction, with tight policy doing the requisite job.
NZ swap rates didn’t show much net movement yesterday, while NZGB yields fell 2-4bps. In the day ahead the domestic focus will be on the RBNZ’s Monetary Policy Review at 2pm, where a step down to a 25bps hike in the OCR to 5.0% is widely anticipated. The OIS is fully priced for such a move, with a small chance of a larger 50bps hike. Anything other than a 25bps would shock the market. With no new forecasts the Bank can afford to keep its options open about the future, but a bias to tighten further will likely remain.
Elsewhere a speech by the Fed’s Mester is during morning trading hours, while the RBA’s Lowe speaks this afternoon, where he will provide more colour around yesterday’s decision. The key economic release will be the US ISM services index, where the market expects a modest fall to 54.4.
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