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.
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23 Comments
maybe we should have our focus on swap rates for signs of inflation receding,but most of us look for evidence of price relief in the necessities we have to buy.nothing showing on the near horizon yet,still hiking those food prices and the council is still guhg-ho on a 10% rise in rates.
In the old days most of our finance industry was NZ owned. Now some of our financiers may be bigger than NZ. Not sure though. The point is that the foreign owned big guys will try to outmuscle our RB to protect their profits. After the last crash, I watched my friends house get auctioned off. The ANZ man said she had cost them $140000. I pointed out to him that their idiot lending people had cost them that money. In the current downturn, I hope that the foreign owned banks lose just as much at all the auctions. The anti high interest jawboning bullshit is to protect the foreigners, at the expense of Kiwis.
As the US continues this path we are going to have to follow otherwise we will truly be the pacific peso, and inflation will continue to be fueled by ever expensive imports. Higher rates for longer. Those thinking rates will return to the artificial lows of covid are wearing tinfoil hats. That said, tinfoil hats can be repurposed to make popcorn...
"Those thinking rates will return to the artificial lows of covid are wearing tinfoil hats … tinfoil hats can be repurposed to make popcorn"
Please tell me how you make popcorn with your tinfoil hat ? Do you put the corn in the tin and pop them in the microwave?
On a more serious note, you seem to have no idea what's coming, the economy is going to tank, badly, worse than we've experienced for a very, very long time, and as a consequence, interest rates are going to be slashed. Copy this comment and post it back in one year 11/04/24
The market is saying the more RBNZ raise rates the more recession is likely and they'll have to cut them anyway so swap yields are static. But the market seems to be discounting that short dated real yields are still negative, the Taylor Rule suggests rates are still too low and that inflation might well stay higher for longer. On top of that, a dismal current account deficit situation makes NZ more prone to devaluation and yield pressure.
Weird. Page title is "RBNZ's shock 50bps hike has back-fired;" but this article is headed "US Treasury yields higher after solid non-farm payrolls report;"
Where is the explanation of why the "shock" 50 bps hike has back-fired? I don't care about all those other currencies. I only shop in NZD.
The RBNZ said at the time of the hike that they didn't expect any mortgage rates to increase, as banks preempted the rises last year and already baked in the increases, but what they had expected was that banks would up their deposit rates.
And no surprise, I don't see any of that yet. As usual, banks are quick on loan rate rises but slow on deposit rate rises.
NZ Swap rates have ignored the OCR rise, some have even fallen instead of rising, Banks haven't increased fixed rates since the OCR rise (and if swaps stay down, they have no reason to) so the OCR rise has (so far) achieved 3/5ths of diddly squat as far as mortgage rates go. Not sure about business loan rates, I haven't read anything about the banks increasing them yet, maybe i just missed it?
Also increasing the OCR is supposed to strengthen our dollar, but its fallen against the USD.
So far the OCR rise has been a bit of a damp squib.
Seems to have been predictable to everyone except those in the RBNZ. Even with this latest hike they are still whining about too much domestic demand.
Err. Hello?
We're spending more because it is costing more, due to supply chain increases and inflation. We're not saving more because even at 5% we're still losing money to inflation. And who in their right mind is going to invest commercially in an evolving recession?
This is why I don't trust them to do the right thing. These so-called experts who can't see the obvious.
The obvious being, if they made cheap money available to banks without limits, banks would lend it to finance mortgages as it's the easiest and safest ROI, inflating the housing market and benefiting property investors, including a majority of politicians and senior public officials.
Unrestricted greed will kill this country.
I'm still waiting on an explanation of why it had "backfired", as per this articles original title, but like you, I don't think it has.
However, the OCR has no direct control over inflation. It tries to steer people into behaving a certain way, which if they did would reduce inflation, but if they don't, increasing the OCR will have no effect.
While they may have dampened the housing market, they have done so at the cost of many of the working public, who have just seen their cost of living skyrocket.
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