In a quiet start to the week, US equities are flat and there has been a small lift in US Treasury yields. Debt ceiling negotiations remain in the headlines, Fed speakers have given mixed messages, and the US empire manufacturing survey has proven to be a source of volatility. The USD has reversed course after a strong recovery last week and the NZD is back trading safely in a 0.62-0.6250 zone. The NZ rates open will be interesting after overnight news of a big change in call on the OCR from our friends at Westpac.
US debt ceiling negotiations remain on the front pages, ahead of the approaching deadline (at this stage likely sometime in the first half of June) to agree on policy to avoid a debt default. Later today President Biden will meet House speaker McCarthy and other congressional leaders to discuss the debt ceiling, the second meeting in a week. Biden said that he was optimistic that a deal could be reached while McCarthy said the two sides remain “far apart” and there had been little movement after staff-level talks last week and through the weekend.
There have been mixed messages from FOMC members. Kashkari, who sits at the hawkish end of the spectrum even more hawkish than Bullard, said “the labour market is still hot, and we have not seen much softening…that tells me that we have a long way to go before we get inflation back down”. Goolsbee showed off his more dovish credentials, telling CNBC that he nearly dissented at the last vote to hike out of concern that officials not over-tighten. Bostic said he now favours a pause with a slight bias to raise rather than cut rates from here, noting there was a long way to go on inflation and his baseline is that “we won’t really be thinking about cutting until well into 2024”. The mixed messages highlight the fuzzy outlook for the US economy and policy, consistent with keeping policy on hold for now.
In economic news, the Empire manufacturing index which measures New York manufacturing activity, unexpectedly plunged from 10.8 to minus 31.8 in April, although that should be seen in the context of its unexpected surge in March. While this drove US Treasuries lower, the move proved temporary, with the volatility in the series giving more noise than signal.
After a dip to 3.455%, the US 10-year rate is trading at 3.5%, up 4bps for the day. US equities have been trading in a directionless manner and the S&P500 is currently little changed, on a day of more optimism on the banking sector, with the KBW banking index up 2½% and the regional banking index up 3%.
Euro area industrial production plunged 4.1% m/m in March, with almost 3 percentage points of that driven by a 26% plunge for Ireland. The data miss could see Q1 GDP revised down from its initial estimate of 0.1% q/q.
After the strong recovery in the USD late last week, which we thought was driven more by technical and positioning than fundamental factors, a modest reversal has been in play to start the week. Commodity currencies have outperformed, seeing the AUD up 0.8% from last week’s close to nudge back above 0.67 and the NZD up 0.7% to 0.6235. Apart from a small nudge down in NZD/AUD to just over 0.93, the NZD is stronger against the other majors. The yen has been the weakest, seeing NZD/JPY up nearly 1% to 84.9.
The domestic rates market showed a modest lift yields in response to higher rates in offshore markets on Friday night, but with some outperformance on a cross-market basis. NZGBs were 4bps higher across the board. The 2-year swap rate rose 4bps to 4.95% while 10-year swap rose just 2bps to 4.17%. NZ’s performance of services index slipped 4pts in April to its lowest level in over a year, into contractionary territory (just) at 49.8. Alongside a contractionary PMI of 49.1, the data certainly don’t deny the chance that the NZ economy is already in recession.
It will be interesting to see how the NZ rates market opens after Westpac changed its OCR call in what looked like an embargoed release at 5am this morning. The bank’s new Chief Economist showed his hawkish credentials, seeing the OCR rise to 6.0% in August and remaining there until 2024. The recent surge in net migration has prompted the change in call, seen to translate into more persistent inflation pressures.
Over recent weeks the OIS market has been relatively sticky in the pricing of the expected peak in the OCR – trading in early May no higher than 5.61% and currently sitting at 5.53%, the strong prevailing consensus being that the RBNZ will deliver one final 25bps hike next week to 5.5%.
The economic calendar for the next 24 hours is full. China monthly activity data will be important, following the weak releases last week. Year-on-year figures for April though will be inflated by the impact of lockdowns a year ago. In Europe, UK labour market data and an updated estimate of Euro area GDP are the released, the latter expected to show a small 0.1% q/q increase for Q1. Canadian CPI and US retail sales data round out the calendar, the latter expected to show some nominal growth In April after falling over the prior two months. FOMC members Mester and Williams will be talking about monetary policy and ECB President Lagarde will also be talking. All up, there’s plenty of info drive the market.
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