The combination of strong US data and speculation of a tweak on policy from the BoJ today have seen US Treasury yields much higher, the 10-year rate breaking up through 4%. The USD is broadly stronger, but the yen is even stronger. EUR is weaker after the ECB softened policy guidance after hiking again. The AUD has been the weakest of the majors while the NZD has gone sub-0.62 again.
The ECB delivered the well-anticipated 25bps hike that takes the deposit rate to 3.75%, a record high for the Euro area. Forward guidance was that the key policy rates “will be set at sufficiently restrictive levels for as long as necessary to achieve a timely return of inflation to the 2% medium-term target”, and the Governing Council will “continue to follow a data-dependent approach”. President Lagarde said that officials had an “open mind” on the September decision and beyond, “so we might hike, and we might hold” and if the ECB does pause “it would not necessarily be for an extended period”.
This forward guidance by the ECB was seen by the market as more dovish than expected, seeing Germany’s 2-year rate down 5bps for the day and the 10-year rate down 1bp against a backdrop of higher US Treasury yields and EUR has fallen over 1% since the meeting and settled below 1.10.
US economic data releases were all stronger than expected, sending Citigroup’s US economic surprise index up to its highest level in more than two years. This illustrates how the recent run of US data has proved more resilient than expected and the seemingly lack of traction of the aggressive monetary policy tightening to date.
US GDP rose an annualised 2.4% in Q2, with consumer spending up a solid 1.6%, considering the outsized 4.2% gain in Q1. Business investment was strong and stronger than expected durable goods orders bode well for future investment. Initial jobless claims continue to undershoot expectations, and at 221k were the lowest level since February, conveying a message of a still-robust labour market.
On the inflation side, the GDP report showed weaker than expected PCE deflators with the core rate down to an annualised 3.8%, the lowest increase in over two years.
US Treasuries rose after the release of the economic data, with the 2-year rate up 9bps for the day and the 10-year rate up 15bps to 4.01%, after being boosted after a Nikkei report on the BoJ (see below). Interestingly, the market hasn’t jumped to the conclusion that more Fed hikes are needed, with the September meeting priced at just 6bps and a cumulative 10bps priced through to November, suggesting a less than even chance of another 25bps hike.
The data triggered a broadly stronger USD although the exception has been a stronger yen after the Nikkei reported that the BoJ, at its policy meeting today, will discuss tweaking its yield curve control policy “to let long-term interest rates rise beyond its cap of 0.5% by a certain degree…in what would be a shift toward a more flexible policy approach”. Until now, sourced reports have been hosing down market expectations for a change in policy, but this fresh leak saw a rebound in the yen against a backdrop of a strong USD, with USD/JPY dropping from over 141 to 139.50.
In other currencies, GBP is weaker alongside EUR to a similar degree, trading down at 1.28. Yesterday afternoon, the NZD and AUD led the charge as some USD weakness prevailed, seeing the NZD briefly above 0.6270, before a reversal ensued and the stronger USD overnight now sees it back below 0.62. The AUD rose above 0.6820 yesterday afternoon and has since fallen over a full cent to just over 0.67, seeing NZD/AUD push back up through 0.92. The NZD is stronger against the EUR and GBP but weaker against JPY, down to 86.2.
US equities were buoyed by the stronger data with the S&P500 up 0.9% at one stage but the higher rates backdrop has now eroded those gains and as we go to print the index shows a loss of 0.5%. Earlier, the Euro Stoxx 600 closed up 1.4% to reach its highest level since Russia invaded Ukraine.
Domestic rates followed the post-FOMC fall in rates, with swap rates down 3-4bps, the 2-year rate closing down at 5.43%. Longer term NZGBs underperformed, even though the latest bond tender was well supported, with strong bid-cover ratios across the lines and just one bid taking out the $50m of 2051 bonds on offer. The 5-year rate fell 3bps, while the 10-year rate rose 1bp to 4.65%. Since the NZ close the Australian 10-year bond future is up 11bps in yield terms, setting the scene for much higher NZ rates on the open.
In the day ahead, focus turns to the BoJ policy meeting. With inflation tracking well above target for over a year, the BoJ should be shifting away from its ultra-easy policy stance. Until yesterday, the consensus was that no change was likely at this meeting, following sourced reports that suggested as such, but the overnight Nikkei report likely changes that assessment and increases the chance of a policy tweak. Still, it’s a case of baby steps from the BoJ and a tweak to its yield curve control policy would be the bare minimum policy response to the higher inflation backdrop.
Ahead of that, NZ consumer confidence, Tokyo CPI and Australian retail sales data are released. Tonight sees German CPI and the US employment cost index. US consumer spending data and PCE deflators are also released, but with quarterly data already released last night, the value-add is just the monthly sequence.
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