Newsflow has been light but that hasn’t stopped a further sell-off of global bond markets, with the US 10-year Treasury trading at a fresh 16-year high and Germany’s 10-year rate at a 12-year high. The DXY USD index rose to a fresh high for the year. The NZD has been surprisingly resilient, holding steady around 0.5960, amidst further pessimism around China, seeing NZD/AUD push higher.
On paper it looks to be a quiet week ahead, but bond markets are still smarting from last week’s higher-for-longer message from the Fed which sees Treasuries unwind Friday’s rally and re-steepen. The 2s10s curve is currently 8bps steeper and at minus 60bps is at its steepest level in four months and compares to the minus 108bps level reached in early July. The 2-year rate is up 2bps to 5.13% while the 10-year rate is up 10bps to 4.53%, a fresh 16-year high. Global curves show the same steeper pattern and Germany’s 10-year rate is up 6bps to a fresh 12-year high of 2.80%.
Real rates have been behind the increase, with the real 10-year Treasury up 10bps to 2.16%, its highest level since 2009, while the break-even inflation rate has been steady.
Fed speakers will be out in force this week after last week’s meeting. We already heard from some at the end of last week, as we reported yesterday. Overnight, Chicago Fed President Goolsbee said that the risk of inflation staying higher is still the bigger risk and that the debate will soon shift to how long to hold rates high. Reduced conviction on the potential for rate cuts next year has been a key force behind steeper yield curves recently.
Despite the rebound in rates, US equities have begun the week on a slightly stronger footing although the session has been choppy. The S&P500 is currently up 0.2%, following three consecutive weekly declines.
The USD has continued its upward trend evident since mid-July and the DXY index broke 106 for the first time this year, up 0.4% for the day, with EUR trading below 1.06, and GBP trading below 1.22. The yen has also been modestly weaker, the dovish BoJ last week and higher global rates not helping, but USD/JPY met some resistance just below 149.
China’s troubled property developer Evergrande was back in the news after it scrapped a debt restructuring plan because its property sales were worse than expected and an investigation into one of its subsidiaries barred it from issuing new bonds. Its share price plunged over 20% and set off a fall in other property developers. China’s CSI index ended the day down 0.7% while Hong Kong’s Hang Seng index fell 1.8%.
As a result, there was downward pressure on the yuan and this spilled over into a weaker AUD. The NZD remained surprisingly resilient, following last week’s leading performance, flat for the day at near 0.5960 against a modest fall in the AUD to 0.6420, seeing NZD/AUD push higher to 0.9290. A factor in this dynamic was tumbling iron ore prices, which fell as much as 4.7%, with talk of buyers holding back amid persistent weakness in China’s property market. Metal prices were broadly weaker on the LME, with copper, aluminium, zinc and others all lower.
In economic news, German business confidence, as measured by the IFO survey, was little changed in August, in line with the consensus, with the expectations component nudging up to 82.9, consistent with the economy remaining in a mild recession.
In the domestic rates markets, rates were lower across the board, largely reflecting the offshore moves on Friday night. NZGBs fell 4-5bps and swaps fell 3-4bps. The Australian 3-year bond future is up 4bps in yields terms overnight while the 10-year bond future is up 9bps in yield terms, setting the scene for a reversal of rates on the NZ open and some steepening pressure. As the week progresses, focus will increasingly turn to next week’s RBNZ MPR, where most expect a business-as-usual update from the Bank with no change in rates (again), even if the OIS market prices a small chance (5bps) of another hike.
In the day ahead we’ll hear from the Fed’s Kashkari during NZ trading hours, who has been on the more hawkish side of the committee. Tonight sees the release of US new home sales and the Conference Board measure of consumer confidence.
Daily exchange rates
Select chart tabs
1 Comments
Following the rates must be a tough job day in & day out. I think I'd go cross-eyed. Higher for longer is buy-in at this juncture but the reality is we are [all] only one big break - in Japan, USA, UK, Russia, Europe & everyone's favourite horse of the day - China - away from things going upside down once again. It's almost impossible to pick exactly where & how it will manifest but we'll know it when we see it. It will be obvious when it happens. Some are saying it is happening already in China & it's hard to disagree with that. However, they have levers you & I have never even heard about, so it will be a 'must view' on their path through this current period. The fact that they have substantially reduced their data available globally is significant in my view. Less data leads to less trust in my book, but I'm old fashioned like that.
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.