Global rates push higher. Nerves ahead of Fed meeting in 24 hours, much higher than expected Canadian CPI inflation data and higher oil prices not helping. Further recovery in global dairy prices at the overnight GDT auction

Some nerves are evident ahead of the Fed’s meeting in just under 24 hours, sending US Treasury rates higher, not helped by stronger than expected Canadian inflation data and oil prices rising to a fresh 10-month high. Commodity currencies have modestly outperformed, seeing the NZD consolidate further above the 0.59 mark. The S&P500 is currently down 0.2%.

Canadian CPI data for August, showed the annual headline rate jumping from 3.3% to 4.0%, driven by higher gasoline prices.  The average of the two key core measures jumped from 3.7% to 4.0%, three-tenths higher than expected. The stronger data drove higher Canadian rates, driven by the short end, with the 2-year rate up 12bps and the 10-year rate up 10bps. The market moved to price in a 50/50 chance of the Bank of Canada tightening at its next meeting in late October and another full hike priced by the January meeting, which would mark a six-month pause in the tightening cycle from its last rate hike in July.

Higher Canadian rates spilled over in the US Treasuries market, with the 10-year rate rising from 4.32% to 4.36% after the release, the peak coming within a fraction of the August high. The rate is currently 4.35%, up 5bps for the day and 4bps since the NZ close.

Adding to weak bond market sentiment has been higher oil prices and a march towards the USD100 per barrel mark now seemingly inevitable, a level the market is widely expected to test. The story is now familiar, with record demand amidst tight supply conditions as Saudi Arabia enforces production curbs, a state of affairs that will extend into the next quarter. Brent crude met resistance a fraction below USD96 and currently sits just below USD95.

The overnight GDT dairy auction showed a 4.6% lift in the price index, a second strong consecutive rise, as indicated by pricing on the SGX-NZX market, both whole milk and skim milk powder up by around 5%. The recent plunge in prices and concerns about dairy production, as we head into El Nino weather conditions, have seen buyers return to the market.

In other news, US housing starts showed a surprisingly sharp decline of 11.3% m/m in August to a three-year low, driven by the multi-family component. While higher mortgage rates are likely to be a factor, consistent with the recent plunge in homebuilder sentiment, bad weather in the west was also a likely contributing factor. Building permits were stronger than expected at 6.9% m/m.

In currency markets, commodity currencies have outperformed, with AUD, CAD and the NZD at the top of the daily and overnight leaderboard in that order, although gains have been modest. The AUD has pushed up to 0.6460. USD/CAD fell below 1.34 after the strong CPI noted, but it has since settled at 1.3440. The NZD met some resistance just under 0.5950 and currently trades at 0.5930. NZD/CAD fell to a fresh 10-month low and sits at 0.7970. After a brief look above 0.92, NZD/AUD has settled at 0.9180. Other key majors show insignificant moves against the USD, and NZD crosses against EUR, GBP and JPY are all modestly higher.

The domestic rates market showed a flattening bias, as seen offshore in the previous overnight session, with the 2-year swap rate rising by 4bps to 5.60% and the 10-year rate down 2bps to 4.86%, with positioning in the swaps market seemingly playing a role in the 6bps of curve flattening. NZGBs saw less flattening pressure than that, with rates up 1-3bps across the curve.

In the day ahead, NZ current account data are expected to show the deficit narrowing to about 8% of GDP, still too high for comfort. UK CPI data are expected to be also too high for comfort, with the headline rate ticking up to 7% and the core rate ticking down to 6.8%. Market trading is likely to be quiet ahead of the Fed’s policy announcement at 6am NZ time tomorrow morning. There is a strong consensus that the Fed won’t hike rates but will keep alive the possibility of a further hike later in the year, depending on the data. The dotplot of rate projections is expected to show the median FOMC member expecting another hike this year and perhaps one rate cut trimmed from next year’s projection, consistent with a “higher-for-longer” message.