Strong UK inflation figures drove UK rates higher, spilling over into other markets, pushing up US Treasury yields to their highest levels in a month. Equity markets and currency markets remain well contained, with the NZD continuing to hover around 0.62. Focus today turns to the NZ Q1 CPI.
Annual UK CPI inflation remained in double-digits for the eighth month of the past nine months, at 10.1% y/y in March, defying expectations of a drop to 9.8%, while the core rate remained steady at 6.2%, two-tenths higher than expected. Food price inflation reached a fresh high of 19.1% while higher energy prices have contributed to the annual headline figure. Sticky UK headline inflation contrasts with the weaker trend seen in other regions such as the US, Euro area and Canada, but base effects (as past higher energy costs drop out) should see UK inflation drop sharply into year-end.
Coming on the back of stronger than expected wage inflation, the data cemented expectations that the BoE will deliver anther 25bps hike next month to 4.5%. The market now prices a high chance of a follow-up move in June and another hike later in the year that will take the policy rate to 5%. UK gilt yields were higher across the curve, led by the short end, with the 2-year rate up 14bps and the 10-year rate up 11bps.
Higher UK rates spilled over into other markets, pushing Treasury rates higher, with 2 and 10-year rates trading at their highest level in a month at 4.28% and 3.64% respectively. The latest Bank of America Fund Manager survey released earlier this week showed that investors’ fears of a credit crunch had driven up bond allocations to a net 10% overweight, the highest since March 2009, which gives some context to the recent sell-off in Treasuries.
US equities are on track for another flat session. Morgan Stanley was the last of the big banks to report, with earnings down 19%, driven by investment banking and trading divisions and increasing credit provisions related to commercial real estate and a deteriorating macro outlook. One of the smaller banks on the watchlist – Western Alliance – soared over 20% after saying deposits rose $2b during the first half of April, boding well for other smaller banks due to report.
The VIX index continues to push lower, down to 16.3, its lowest level since late-2021, pushing our risk appetite index (which also includes credit spreads) up to 50%, or a neutral level relative to a 20-year history.
Net currency movements have been small, with the NZD hovering around 0.62 and the AUD tracking just over 0.67. GBP swung back and forth in the wake of the strong UK CPI data, but its net gain on the day has been small – highlighting, as we’ve seen for NZ, that rising expectations for tighter monetary policy aren’t always positive for the currency, given the side effect of a likely weaker economy. GBP is at 1.1240, leaving NZD/GBP hovering just below 0.50.
CAD is the one of the weakest performers, down 0.5% overnight, with a 2% drop in oil prices not helping. JPY also continues to struggle against a backdrop of higher global rates, seeing NZD/JPY push up to 83.5. Bloomberg reports that BoJ officials are wary of tweaking or scrapping its yield curve control policy at next week’s meeting – the first under new Governor Ueda – so soon after the US banking sector turmoil clouded the outlook. The report noted some discussion on whether guidance of policy needs to be tweaked, as it currently mentions COVID19, but even if a change is made, the Bank intends to indicate its stance to continue with easy policy.
Yesterday, NZ rates pushed up for the fifth trading session running, with swaps up 3-5bps and NZGBs up 4bps out to ten years. The 2-10 year swap rates have now tacked on 24-26bps over the past week, with similar moves seen for NZGBs. While the NZ market underperformed on a cross market basis yesterday, the net moves over the past week have been more or less in line with the US and Australia, suggesting more global than local forces at play.
In the day ahead the domestic focus turns to the NZ Q1 CPI, where we see the figure coming in below the RBNZ’s 1.8% q/q estimate (BNZ is at 1.7%, consensus is at 1.5%). We also expect the key non-tradeables figure to come in below the RBNZ’s estimate of 2.0% (BNZ is at 1.5%). All very well, but the data remain too strong for comfort even at the lower end of estimates, hence the market is well priced for another 25bps hike next month. With the 2-year swap rate up considerably from this time last week, market reaction could well be more significant to a downside than upside surprise.
In the US there are a number of Fed speakers, including NY Fed President Williams during NZ trading hours, otherwise only second tier economic releases fill out the calendar.
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