Global markets were generally subdued overnight with investors looking ahead to key US CPI data this evening and the release of the minutes from the September FOMC meeting where the US Federal Reserve held rates steady at a 22-year high of 5.5%.
The FOMC minutes revealed policy makers agreed that the central bank should ‘proceed carefully’ on rate decisions and that incoming data would help determine if another rate hike was required in coming months. It was agreed that rates should stay high for some time to keep bringing inflation down while noting that risks had become more balanced.
US producer prices increased 0.5% in September, beating consensus estimates for a 0.3% rise, with higher food and energy prices contributing to the rise. This took the annual rate to 2.2% which was the fastest pace since April. Excluding food and energy, PPI climbed 0.3%m/m and 2.7% y/y.
Fed Governor Waller said the central bank can ‘watch and see’ what happens before raising rates further as financial markets conditions tighten. Top officials at the Fed have been presenting a common narrative that tighter financial conditions, driven by the recent surge in US treasury yields, may reduce the need for additional increases in the fed funds rate. Futures market pricing implies a less than 10% chance of a 25bp hike at the November FOMC.
Global government bond yields continued to move lower led by the longer end amid short covering flows as the market pulls back from the multi-year highs in yield reached last week. Yields on 10-year treasuries fell close to 10bp intra-day to lows near 4.54% before retracing higher. A 2bp tail in the US$35 billion 10-year auction contributed to the reversal higher in yields. 2-year bonds moved back above 5% following the PPI data resulting in a flatter curve.
Chinese equities have extended the recovery off 1-year lows on news that policy makers are considering raising the 2023 budget deficit for infrastructure spending. It is unusual for the budget to be revised in the middle of the year and a move beyond the usual debt-to-GDP target suggests a greater sense of urgency by policy makers to boost economic growth. The government has avoided fiscal stimulus so far and if the measures materialise, it will mark a shift in stance. The Hang Seng China Enterprises Index was up 1.4% and has now rebounded 5% off the lows from a week ago.
An increase in issuance of Yuan denominated sovereign bonds in Hong Kong, announced by China’s Ministry of Finance, will aid efforts to support the Yuan. The issue of offshore sovereign notes began in 2009 and is forecast to rise to record volumes this year. This will boost demand for the CNH and tighten liquidity. USD/CNH has stabilised in recent weeks after the steady uptrend from January to the beginning of September.
Currency markets were fairly subdued overall with the US dollar index largely unchanged. Amongst the majors, EUR/USD was stable while USD/JPY moved higher though the overnight session to trade up towards 149.20. The Norwegian Krone was an underperformer within the G10 with oil prices unwinding some of the risk aversion related spike from Monday. NZD/USD was stable near 0.6020 in overnight trade while NZD/AUD edged higher to 0.9400.
NZ fixed interest markets moved lower in yield in the local session yesterday continuing to benefit from the improved tone across global bond markets. 10-year government bond yields fell 3bps to 5.40%, 15bps below the multi-year highs reached last week. Swaps outperformed bonds with the 10-year swap spreads back at the recent lows near -20bp ahead of weekly supply. New Zealand Debt Management is tendering NZ$500 million of nominal NZGBs today split across 15 May 2030 ($200m), 15 May 2032 ($225m) and 15 May 2051 ($75m). Australian 10-year bond futures are about 4bp lower in yield since the local close yesterday.
September food prices are released today which will allow us to further refine our Q3 inflation forecasts ahead of next weeks release. The focus overnight will be US CPI data for September. Consensus estimates are for a 0.3% increase in both the headline and the core. Recent inflation data has been encouraging in the US, with 3m annualised core CPI having moderated to just 2.4%.
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