In an uneventful overnight session, global rates have pushed higher, ahead of a chunky 30-year Treasury auction and some nerves regarding US CPI revisions due tonight. US equities are flat, with the S&P500 still unable to break the 5000 mark after getting within a fraction of a point yesterday. The USD is broadly stronger, dragging the NZD back below 0.61, the yen has underperformed and NZD/AUD is getting close to 0.94.
US Treasury yields have drifted higher since the NZ close by about 6bps to 4.15%, with familiar themes of heavy bond supply, uncooperative data, and consistent pushback from Fed speakers on any early start to the easing cycle. After we go to print the results of the $25b 30-year bond auction will be released.
The market has particular focus on the revisions to US CPI figures, due overnight. A year ago, the revisions to seasonal factors shallowed out the previously reported decline for the most recent months and there are some nerves that the upcoming revision will show the same, playing to the Fed’s view of not rushing in with rate cuts.
On that note, Richmond Fed President Barkin’s message was in line with the multitude of other FOMC members since last week’s FOMC meeting, viz “I think we’ve got time to be patient” on cutting rates and he was looking for a “few more months” of inflation data, although he didn’t want to prejudge the decision for the March meeting. He played down the spillover risks from the recent collapse of NY Community Bank, expecting that the banking system has enough capital to weather the risk.
US jobless claims fell 9k to 218k last week, in line with the consensus after accounting for a small upward revision to the previous week’s figure. This took the four-week moving average up to a six-week high, but it’s still not clear whether a new uptrend has begun, given seasonal adjustment issues around the holiday season.
European rates have also drifted higher. ECB Chief Economist Lane pushed back on the market’s view of an early cut to rates. He said “we need to be further along in the disinflation process before we can be sufficiently confident that inflation will hit the target in a timely manner and settle at target sustainably”, adding he thought there was an ”economically meaningful upside risk in this wage issue”. This view followed similar lines expressed by other ECB policy makers. At the hawkish end of the spectrum, Austria’s CB governor Holzmann said there was “a certain chance that there will be no interest rate cut at all this year or only at the very end of the year”.
It’s a contrasting story in Japan, where the market is anticipating a hawkish pivot, but yesterday BoJ Deputy Governor Uchida offered some dovish soundbites in as speech. He said it’s hard to imagine the central bank will be raising its policy rate continuously and rapidly, even after the negative interest rate is ended, adding that financial conditions will remain accommodative. Still, his view was consistent with an eventual end to the negative policy rate, even if the exact timing of such a move remains uncertain.
His speech triggered a weaker path for the yen and the higher global yields have added to the weaker trend, seeing JPY the weakest of the majors over the past 24 hours, with USD/JPY trading nearly as high as 149.50. This has been against a backdrop of broad USD strength, although EUR has managed to hold its ground around 1.0775.
NZD and AUD have underperformed, some spillover from a weaker yuan, not helped by CPI inflation in China deflating by the most since 2009. The index fell 0.8% y/y, with lower food prices explaining most of the undershoot relative to market estimates. The NZD fell back below 0.61 overnight, finding some support around 0.6080. The AUD found support around 0.6480 and currently sits just below 0.65.
NZD/AUD continues to push higher, now getting closer to 0.94 and at its highest level since mid-October. Higher NZ-Australia rate spreads explain the recent move higher, with nerves around the possibility of the RBNZ hiking rates again against a backdrop of more comfort that the RBA is done for the cycle. A higher NZD/AUD cross rate goes against our high conviction view that the cross must ultimately fall, given the backdrop of NZ’s significant economic underperformance versus Australia, but clearly near-term rate differentials are delaying that process.
In the domestic rates market, NZDM had a better tender outcome than we’ve seen over the past few weeks, with bid-cover ratios for the nominal bonds ranging from 2.2 for the longest dated bonds on offer (2037s) to 3.3 for the shortest (2031s) and the two shorter maturities selling 1-2bps below pre-market mids. Rates fell further into the close to see rates little changed on the day, with the 10-year rate at 4.76%.
This was an outperformance relative to the swap market where rates closed 2bps higher across the curve. This saw the 2-year swap rate close at 5.02%, extending the selloff this week to 28bps, a reflection of global forces and flow-through from the stronger than expected NZ labour market reports on Wednesday. OIS pricing suggests a 15% chance of a 25bps hike at the RBNZ’s meeting at the end of the month after adjusting the OIS pricing for the effect of daily compounding.
In the day ahead, RBA Governor Bullock will be testifying in front of lawmakers where she is likely to repeat the line that a further tightening in monetary policy can’t be ruled out, even if the market sees more chance of a rate cut than hike at the next meeting. Tonight sees Canadian labour market data and as noted the US CPI revisions, which could move the market if they are significant.
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