US Treasury yields push higher, ahead of key CPI data tonight. IMF downgrades forecasts. China credit growth strong

US Treasury yields are up modestly overnight, trading with a cautious tone ahead of the key CPI release tonight. The NZD has underperformed, showing a steady fall overnight to just below 0.62, and it is lower on all the key crosses.

There have been a number of global economic releases and commentary from the IMF and Fed speakers, but none of them market moving. The S&P500 is modestly higher and the Euro Stoxx 600 closed up 0.6%. Higher European rates (10-year rates up in the order of 11-13bps) reflect some catch-up to higher US Treasury yields, after their markets were closed during Easter. US Treasury yields themselves have pushed higher again, ahead of the key CPI report tonight, with some modest curve flattening on the back of a 3-year bond auction. The 2-year rate is up 4bps to 4.05% and the 10-year rate is up 2bps to 3.44%.

In currency markets, the USD is down for the day, with modest gains for EUR, GBP and CAD.  The NZD has been a notable underperformer on the day, for no obvious reason, with a steady fall overnight to take it back just below 0.62. NZD/AUD has tracked down towards 0.93 and NZD/GBP has traded below 0.50 for the first time since October. NZD/EUR has fallen to 0.5675, its lowest level since November 2020. While NZD weakness could simply reflect a flow in the market, fundamentally, NZ’s large and widening current account deficit, economic recession, and fears of RBNZ over-tightening policy could all be weighing on sentiment, although domestic factors are usually very much a secondary force.

The IMF trimmed its global growth forecasts made three months ago by 0.1% to 2.8% for 2023 and 3.0% for next year, following the 3.4% lift last year. These figures look optimistic so it’s no surprise that the IMF noted “the risks are weighted heavily to the downside, in part because of the financial turmoil of the last month and a half”. In a separate Global Financial Stability report, the IMF noted the “perilous combination of vulnerabilities” that have been “lurking under the surface of the global financial system for years” and that stress in the banking sector will likely weigh on broader lending conditions and economic growth.

The US NFIB survey showed small businesses facing tougher lending conditions, with a net 9% saying financing was harder to get, the highest in over a decade. While the headline confidence figure fell by less than expected, under the hood there were signs of notable economic weakness regarding capital spending and hiring plans.

The newest member of the FOMC and a voter this year, Chicago Fed President Goolsbee, offered some of the most dovish soundbites heard from the Fed recently. He said that the Fed should “be careful about raising rates too aggressively until we see how much work the headwinds are doing for us in getting down inflation”, noting that the contraction in bank lending conditions could be the equivalent of 25-75bps worth of tightening.

NY Fed President Williams said in an interview that the March outlook of one more interest rate hike this year is a “reasonable starting place”, though the path will depend on incoming economic data. While he acknowledged signs of inflation slowing, core services inflation excluding housing “hasn’t budged yet”. He noted that the economic impact of recent bank turmoil is uncertain but “right now we’re not seeing those effects. And actually the banking system has really stabilised”.

China credit growth was stronger than expected in March, following the recent RRR cut and government encouragement to banks to support the post zero-COVID recovery, with aggregate financing of CNY 5380b in March consistent with a very rapid pace of credit expansion. China inflation data remained weak, being one of the few central banks around the world with inflation running well below target, with the CPI up 0.7% y/y, which can only encourage further easing in monetary policy.

Yesterday, domestic rates showed a mild upside bias, but nothing like the significant lift in US Treasury yields since the Easter break. Swap rates were marked higher soon after the open, but pressure from the receiving side was too great to keep rates up, and they fell away during the rest of the day to finish unchanged for the 2-year at 5.0% and just 1bp higher further along the curve. NZGBs showed a mild steepening bias, with short rates 1bp higher and longer dated rates up 4bps on the day.

In the day ahead, NZ electronic card transactions, which have been choppy of late, will help provide some clarity on overall spending in Q1, shaping up to be a poor quarter unless there was a big jump in spending in March. There are a number of Fed speakers, including Harker and Kashkari during NZ trading hours.

The key release will be US CPI data, with the core measure expected to show a lift of 0.4% m/m and 5.6% y/y. Unless there is a downside surprise, market pricing for another Fed rate hike next month will remain solid. The Bank of Canada is likely to keep policy on hold, but the market will be interested in the Bank’s forward guidance given recent strength in employment and GDP data.