US initial jobless claims sustain recent move higher. US equities unperturbed by higher rates, with small to modest increases. Both BoE and Norges Bank upscale hikes to 50bps

Central banks have been in focus for the day, with the BoE and Norges Bank delivering surprise 50bps hikes and these moves adding to upside pressure on global rates. US equities remained unperturbed by the rising rates backdrop while net currency moves have been modest, even if the USD shows broadly based gains. The NZD is back trading below 0.62 while the yen continues to weaken towards the intervention zone.

The BoE surprised the market with a larger than expected 50bps hike in its policy rate to 5.0%, thereby moving back to double-hikes after the last two 25bps hikes. The more aggressive move should be seen in the context of much stronger than expected labour market and CPI data, raising the spectre of a vicious wage-price spiral. There remained dissent on the committee with the familiar two doves arguing for no change. A tightening bias remained – further tightening “would be required” if there were to be evidence of more persistent inflationary pressures. Governor Bailey said “the economy is doing better than expected, but inflation is still too high and we’ve got to deal with it”.

The UK 2-year rate rose by “only” 2bps on the day and the 10-year rate fell by 4bps, with the 2s10s curve further inverting to minus 71bps, breaking the low seen during the GFC. The market prices a further 115bps of hikes that would take the policy rate up through the 6% mark, with a good chance that the next move in August is another 50bps hike. Tellingly, despite the hawkish update, GBP saw only a temporary spike higher and shows a modest fall for the day to 1.2740, albeit in the context of a broadly stronger USD. This suggests growth concerns outweighing the impact of higher rates for GBP.

Earlier in the session, Norway’s Norges Bank also surprised with a 50bps hike (albeit that was seen as a closer call), while the Swiss National Bank hiked by 25bps. Fed Chair Powell spent another session in front of lawmakers and reiterated the prevailing view that if the economy performs about as expected, it will be appropriate to raise rates again this year.

Against this hawkish backdrop, US Treasuries are up 8bps for the day, with the 2-year rate at 4.80% and the 10-year rate at 3.80%, the 2s10s inversion steady at minus 100bps, approaching the lows seen just before Silicon Valley Bank failed. German bunds showed a flattening bias in the context of higher rates, with the 2s10s spread of minus 74bps the most inverted since 1992.

Despite the higher rates backdrop, US equities remained well supported, with the S&P500 currently up 0.2% and the Nasdaq index up 0.7%. Data from a research firm showed daily flows from retail investors over the past week topping $1.5b for the first time since February, supporting other flow data consistent with money coming off the sidelines and flowing into US equities.

In currency markets, net movements have been small but with the USD broadly stronger, giving some hint of risk aversion, even if not evident by US equity market trading.  The BoJ’s ultra-easy stance stands out by even more against other central banks and yen continues to suffer the consequences, USD/JPY is up through 143, approaching levels where we might soon see some official intervention. The yen has dropped to a record low against CHF (surpassing the 1979 low). NZD/JPY is up modestly to 88.3.

The NZD is trading back below 0.62, and is currently trading near its overnight low around 0.6175.  Cross movements have been modest, albeit notably NZD/AUD pushed up towards 0.9170 overnight (currently 0.9145), with underperformance of the AUD traced back to some yuan-proxy selling as USD/CNH hit the 7.20 mark again. AUD is down to 0.6755.

Oil prices remained choppy, with a 4% fall for the day, taking Brent crude back below USD74 and WTI sub-USD70, with the market largely ignoring data showing US crude inventories falling by 4 million barrels last week.

In economic news, US initial jobless claims sustained their recent increase, coming in at a slightly higher than expected 264k, the same as the previous week’s upwardly revised figure. The data support the view that this increase is “for real”, consistent with leading indicators suggesting a notable easing of labour market pressures is underway. The existing home sales market remained depressed, with a 0.2% lift in sales off a low base and a lack of inventory on the market, with homeowners reluctant to move which would entail giving up their 30-year mortgages set at much lower levels than currently available.

Yesterday, NZ rates were lower on the open, driven by global forces, before heading higher ahead of the government’s bond tender. Higher rates then attracted strong bidding across all lines, and rates fell into the close. The net result was a 2-4bps lift in yields across most of the NZGB and swaps curves with a slight bias to flatten. This represented an underperformance on a cross market basis, with the NZ-Australian 10-year bond spread back up through 50bps. The Australian 10-year bond future is up only 4bps in yield terms since the NZ close.

In the day ahead, Japan CPI data are expected to show the core measure (ex-fresh food and energy) rising to a fresh 40-year high. Focus tonight will be on global PMI data, expected to show relatively stable manufacturing indices entrenched in contractionary territory alongside some widespread slippage in services indices, albeit still safely in expansionary territory. A number of FOMC members are also on the speaking circuit.