Since we left for the Easter break, US Treasury yields have pushed higher, with the greatest move coming in the aftermath of another solid non-farm payrolls report. The USD has shown broadly based gains. JPY has been the weakest performer, against a backdrop of higher Treasury yields and a business-as-usual message from new BoJ Governor Ueda. The NZD has underperformed, falling below 0.62 and recovering to settle just over that level this morning.
Since we left the office on Thursday, there has been a plethora of US labour market data. There were significant revisions to seasonal factors for jobless claims, so that recent history now shows a meaningful uptick over the past couple of months, with the 4-week average now running at 238k (previously 198k). The Challenger job layoffs series leads initial jobless claims and it has been picking up strongly over recent months, with about 90k in March or 270k over Q1, the latter compared to 56k a year ago.
Non-farm payrolls rose a solid 236k in March, in line with expectations, although the figure was boosted by a 47k lift in government jobs. The data were consistent with some further moderation in employment growth, but still at a robust level, although the leading indicators point to significant weakness ahead. The NFIB small business hiring index, one of the best leading indicators of payrolls growth, fell to a 34-month low. The 0.3% m/m gain in average hourly earnings was consistent with further moderation in wages inflation, with the 3.8% annualised rate in Q1 the smallest increase in nearly two years.
Overall, while the US labour market is clearly easing, the data weren’t considered weak enough to give the market conviction in a pause in the rate hike cycle, and the balance has been tipped towards a further 25bps hike next month, with 18bps now priced. With no more payrolls reports ahead of that meeting, weaker CPI or other events could still tip the balance to no change in rates. US Treasury yields are higher since Thursday’s NZ close with the largest move coming in the aftermath of the payrolls report, the 2-year rate up 25bps to 4% and the 10-year rate up 12bps to 3.41%. US equity markets were closed Friday, and the S&P500 currently shows a small fall overnight in a light trading session, recovering from a 0.8% loss on the open.
In overnight news, to which there was no market reaction, year-ahead inflation expectations, measured by the NY Fed’s survey, rose for the first time since October to 4.75% in March (prev. 4.23%). There was only a 0.1% change in the 3 and 5-year measures, up slightly and down slightly respectively to 2.8% and 2.5%.
A stronger than expected Canadian employment report followed recent GDP data showing the economy on a stronger footing in Q1 than the Bank of Canada expected. Further strong data would challenge the central bank’s “pause” view on rates and the market’s view that the tightening cycle has ended in Canada.
US banks reduced their borrowing from the two key Fed backstop facilities, the traditional liquidity discount window and the new Bank Term Funding Programme, to a combined $149b (previously $153b), retreating for the third straight week. Again there was a switch, with less borrowing at the punitive discount window, down to $70b, and more borrowing at the generous BTFP, up $79b. In separate data the Federal Home Loan Bank, which plays a role in lending to distressed banks, issued $37b of debt in the last week of March, a large drop from the $304b two weeks earlier, another indicator of less liquidity stress in the banking sector.
While the most acute phase of the liquidity crisis is over, the economic impact is only just beginning, with US commercial bank lending contracting by the most on record, down $105b over the two weeks ending 29 March. Commercial bank deposits fell $65b in the latest week, the tenth consecutive weekly fall, with funds being directed into higher yielding and safer Money Market Funds.
Ahead of the IMF’s spring meeting, the Managing Director outlined a sobering outlook, with projected global growth of around 3% over the next five years, its weakest medium-term growth forecast since 1990. Its new forecasts will be released this week, and the IMF projects global growth moderating to less than 3% in 2023.
New BoJ Governor Ueda gave his first press conference with a business-as-usual message, viz “given the current economic, price and financial conditions, I think it’s appropriate to keep up the current yield curve control”. This dashed hopes for an early shift away from YCC and the yen weakened.
In currency markets, since NZ’s Thursday close the USD has shown broadly based gains. The yen is the worst performer, against the backdrop of higher US Treasury yields and Ueda’s dovish comments, with USD/JPY up 1.8% to 133.65. The NZD has underperformed, falling over 1% to just over 0.62, after a brief look below 0.62 earlier this morning. CAD and EUR have shown the smallest falls since Thursday, down in the order of 0.2-0.3%.
So on the crosses, NZD/JPY is up to 83 and lower on the rest, with NZD/CAD below 0.84, NZD/EUR at 0.5720 and NZD/GBP closing in on 0.50. NZD/AUD is down modestly to 0.9355.
Thursday seems like ages ago now, but in the last trading day before Easter, NZ rates showed decent falls, led by the short end of the curve, further unwinding the initial market reaction seen post the RBNZ’s MPR 50bps rate shock on Wednesday. The 2-year swap rate fell 13bps to 4.99%, the 5-year rate fell 11bps and the 10-year rate fell 5bp. The 2-year rate is now only 3bps higher than the pre-MPR level, with longer term rates lower. The market reaction suggests the RBNZ’s shock move has back-fired. Some market intelligence gathered pre meeting would have suggested a significant curve flattening to a larger rate hike, with the market disbelieving of the necessity for an aggressive move with the economy likely already in recession. The NZD is weaker on all the crosses apart from NZD/JPY since the MPR, with the TWI down about 0.9% since that time, suggesting no bang per buck from the currency either.
A similar market reaction was seen in NZGBs, with the bond tender well supported, particularly for the $200m of 2026s on offer, which had a bid-cover ratio of 6.25 and issued at 10bps below the pre-tender mids. Strong demand was supported by the forthcoming lift in index duration following the maturity of the April-2023s.
In the day ahead, it’s a case on mainly second-tier economic releases, with China inflation and the US NFIB small business survey perhaps of some interest.
In the week ahead, the key focus will be on US CPI, PPI and retail sales data.
We welcome your comments below. If you are not already registered, please register to comment
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.