Strong US data have driven an extension of the global bond market selloff this week, with many rates reaching highs not seen for ten or more years. The burden of higher rates has driven global equities lower and commodity currencies like the NZD have underperformed.
US economic data released overnight were stronger than expected. ADP private payrolls surged 497k in June, the fastest pace in nearly a year, with strong gains for leisure and hospitality and construction. Initial jobless claims showed a 12k lift last week but continuing claims fell to their lowest level since February. The Challenger job cuts report for June showed a sharp slowdown in the pace of layoffs, dropping from a 287% increase to 25%, seeing the number of layoffs fall to an eight-month low. The JOLTS report showed job openings nudging down but remaining high at 9.8m, alongside the still-high job openings to unemployed ratio of 1.6. The quits rate lifted to 2.6%, suggesting increased job security.
The ISM services index rose 3.6pts to 53.9 with the employment index gaining nearly 4pts to 53.1, suggesting solid growth momentum in the services sector and supporting the solid backdrop of the other labour market reports. Of some consolidation, the prices paid index continues to trend lower, down over 2pts to 54.1, a leading indicator of weaker wage and core inflation ahead.
Overall, the services sector shows barely any ill-effects from the aggressive tightening in US monetary policy to date and the labour market isn’t easing to the extent necessary to bring some level of comfort to the inflation outlook. The strong data drove an extension of the bond market sell-off seen so far this week, with nerves evident ahead of the key non-farm payrolls report tonight.
Pricing for the upcoming Fed meetings now show +22bps priced for July and a better than even chance of a follow-up hike by November. US Treasury yields are higher, led by the belly of the curve. The 2-year rate traded as high as 5.12%, the highest level since 2007 after surpassing the high just prior to the-Silicon Valley Bank failure in March. It is currently up 5bps on the day to 5.0%. The 5-year rate is up 11bps while the 10-year rate has blasted up through the 4% mark to trade up 10bps on the day to 4.03%.
Speaking for the first time since the June Fed meeting, Dallas Fed President Logan showed off her hawkish credentials saying she “remained very concerned about whether inflation will return to target in a sustainable and timely way”, arguing it would have been “entirely appropriate” to raise rates at that meeting rather than pause. She was sceptical about the argument of the lagged consequence of rate increases doing the work in cooling the economy.
The sell-off in Treasuries spilled over into European markets, with German and UK 10-year rates up in the order of 15-16bps. This latest upward move in global rates has finally had a notable impact on the equity market. US equities are down in the order of 0.8% while the Euro Stoxx 600 index closed down a hefty 2.3%.
The USD was on a weaker path heading into the data releases and it bounced higher after the reports, making net movements for the day modest overall. EUR and GBP are both modestly higher for the day, with higher European rates keeping pace with that seen in the US and much stronger than expected German factory orders offering some support as well.
A large upward move in global rates would normally drive the yen lower, but even JPY has managed to make a modest gain on the day, with lower risk appetite offering some support. Furthermore, the Nikkei reported an interview with BoJ Deputy Governor Uchida, where he said a balanced approach should be taken on tweaking its yield curve control policy. Such comments on policy help fuel speculation that a policy tweak might be forthcoming at its meeting later this month.
Lower risk appetite has seen the commodity currencies underperform, with the NZD, AUD and CAD all showing some modest falls overnight. This sees the NZD back down towards 0.6150 and AUD down to 0.6625. NZD/AUD is trading close to 0.93. Other key NZD crosses are lower. Yesterday, the PBoC continued to set a stronger CNY reference rate with yesterday’s premium compared to Bloomberg survey estimates being the largest so far. This low-cost policy is helping to contain the pace of yuan depreciation, against heavy fundamental forces that should be driving the yuan a lot weaker.
In the domestic rates market, global forces drove some NZ rates to fresh multi-year highs. NZDM completed a successful syndicated tap of the 2033 bond, issuing the maximum amount sought of $5b and at the tight end of the pricing range, at 4bp over the 2032 bond. There was evident strong demand, with a final order book of over $12b, the attraction being the historically high yield and NZGB yields trading above swap at the long end of the curve. The 10-year rate rose by just 4bps on the day, a strong outperformance compared to much higher US and Australian rates for the day. Still, the 4.71% close was the highest for the generic 10-year NZGB in 9½ years. It was a case of fresh multi-year closing highs for other NZ rates, with the 5-year NZGB up 6bps to 4.73%.
In the swaps market, fresh highs were limited to the short end of the curve, with the 2-year rate up 7bps to 5.59%, a level not seen since 2008. The 5 and 10-year swap rates were up 10bps to 4.86% and 4.71% respectively, but higher rates were seen earlier this year and late last year. Upward pressure on NZ rates will remain for today’s trading day, with the Australian 3 and 10-year bond futures up around 12bps in yield terms overnight.
Focus tonight will be on the US employment report where the consensus is for non-farm payrolls growth to slow to a rise of 225k, with a nudge down in the unemployment rate to 3.6% and a nudge down in annual average hourly earnings inflation to 4.2%. Canada’s employment report is also released, while ECB President Lagarde will be speaking.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.