Weaker than expected US PPI, UK GDP and euro area industrial production data supports extended bond market rally. Domestic rates tumbled yesterday, some attributed to weaker pricing indicators

Ahead of the Fed’s latest policy update at 8am, some weaker data prints across the US, UK and euro area have helped pushed down global rates. The move has been greatest for the UK, with weak GDP seeing a 14bps drop in yields and GBP underperforming. The NZD has recovered the loss seen during NZ trading hours as domestic rates tumbled, and it is little changed from this time yesterday at 0.6120. US equities are flat.

The trading session ahead of a Fed meeting is usually dull but there have been some notable market moves, driven by weaker than expected data releases.

The US PPI was flat for both the headline and core in November, seeing drops in annual inflation for both series, to 0.9% y/y and 2.0% y/y respectively, the latter two tenths below expectations. The data support other indicators of disinflationary forces in the economy. Based on the CPI and PPI figures, Pantheon Macroeconomics estimates that the core PCE deflator – the figure targeted by the Fed – will show only a 0.1% increase for the month, taking the annual figure down to 3.3% y/y, supporting the case for easier monetary policy next year.

The figures triggered an extension of the prevailing bond market rally, with the 2-year rate down 7bps on the day to 4.66% and the 10-year rate down 5bps to 4.15%, a decent move considering the FOMC announcement due at 8am. The Fed will also release updated projections, followed by Chair Powell’s press conference, with almost no chance of any policy adjustment. Higher unemployment rate and lower inflation forecasts should imply a softer tone than previously, although the Fed will likely be reticent to sanction the current scope of timing of rate cuts priced by the market for next year. Just ahead of the announcement, the market is pricing 115bps of rate cuts next year. Any comments that the Fed could still hike again would likely fall on deaf ears; the market is well and truly focused on upcoming easing cycle.

UK GDP fell by 0.3% m/m in October, two-tenths weaker than expected, with falls across all three key sectors spanning services, industrial production and construction, with odds now favouring that the economy will contract over Q4 overall, going against the grain of the recent pick-up in PMI data. The market priced in greater scope for easier monetary policy next year, with 20bps of cuts now priced for May and some 100bps of cuts priced for next year, with the 2-year and 10-year UK gilt yields tumbling 13-14bps for the day.

In another weak data print, euro area industrial production fell by a larger than expected 0.7% in October, adding to the likelihood that the region fell into recession over the second half of the year, even if mild. A Bloomberg survey earlier in the week already showed expectations for a second consecutive quarterly contraction in GDP for Q4 and the weaker industrial production figures support that view.

Yesterday, the domestic rates market saw some meaty moves, led by the swap curve, with the 2-year rate falling 11bps to 5.06% and the 10-year rate down 11bps to 4.61%. The significance of this is that, for the first time, the 2-year rate closed below the level (of 5.12%) prevailing just ahead of the RBNZ’s hawkish update late November. NZGB rates were dragged down for the ride, albeit to a slightly lesser extent, with most rates down 9bps, the 10-year rate down to a four-month low of 4.79%.

Some attributed the fall in rates to a delayed reaction to the NZ pricing indicators that came out at noon, with Bloomberg reporting comments by some local banks that they were much weaker than expected, but surely other factors were also in play. From our perspective, the range of pricing indicators released didn’t change our Q4 CPI forecast of 0.6% q/q and 4.7% y/y, which sits below the RBNZ’s forecast of 5.0%. By contrast, Westpac sliced three-tenths off its pick to 0.3% q/q. Annual food price inflation moderated to 6.0% y/y, its lowest rate in nearly two years, but that was slightly higher than we were picking.

In other local news, REINZ data showed further upside momentum in sales activity and pricing, although helped by positive seasonal effects. The house price index rose for a sixth consecutive month to be up 4.9% from the May trough, recovering over a quarter of the peak-to-trough 17.8% price decline. The current account deficit of 7.6% of GDP was slightly larger than expected.

In currency markets, the tumble in domestic rates drove a weaker NZD, with broad USD gains adding to that dynamic. The fall stopped at 0.6084 before a recovery ensued, with the weak US PPI data adding to the move and the NZD currently sits around 0.6120, little changed from this time yesterday. The AUD has outperformed, recovering to 0.6580 and seeing NZD/AUD fall to 0.93.

The weak GBP print and lower UK gilts drove a weaker GBP, the worst of the majors, down towards 1.25 and NZD/GBP approaching 0.49. Weak euro area industrial production and weak US PPI have been offsetting forces, seeing EUR trade flat just under 1.08. The lower global rates backdrop has helped support the yen, with USD/JPY approaching 145, and NZD/JPY sustaining a fall below 89.

In addition to the Fed meeting, there is also little chance of any rate changes at the ECB and BoE policy meetings tonight. The market will be looking for signals on when the easing cycle might begin, but the central banks will be reluctant to provide any clear guidance on that, other than it is too early to be discussing rate cuts.

There are a few economic releases that will pique the interest of the market NZ Q3 GDP is expected to show sluggish growth for the quarter (-0.1 to 0.3% covering the range of estimates for the major local trading banks), or a notable contraction when measured on a per capita basis. Australia’s employment report and US retail sales are also released.