It has been a quiet start to the week, with a large number of Asian markets closed for Lunar New Year holidays and little newsflow. US equity markets have edged higher, extending the record-breaking run, US Treasury yields have traded in a tight range and in currency markets the NZD has lost a little air after last week’s outperformance.
The only market mover of interest has been some modest NZD weakness after its broadly based gains of last week that followed stronger than expected labour market data and, on Friday, ANZ’s surprising change in rate call of predicting two more hikes by the RBNZ over the next two meetings.
The rest of the market isn’t buying into that view although remains on alert. Yesterday, the domestic rates market was a bit messy. The day opened with a nearly full rate hike priced by May, but by the end of the session pricing had faded to a 65% chance, with the chance of a hike later this month fading to 33%, after being close to a 50/50 bet. Near-term bill futures fell about 5bps on the day in yield terms but swap rates were up 3-4bps across most of the curve, highlighting the sort of messy day it was, with positioning adjustments ongoing. NZGB yields were 2-3bps higher across the curve, more reflecting global forces.
The RBNZ was facing lawmakers regarding financial stability and the annual review and one comment that got our interest was Governor Orr saying “core inflation is what really matters to us” while downplaying the split between tradeables and non-tradeables. This is important to the extent that all core measures of inflation are falling as fast as they rose, at a time when the fall in non-tradeables has been a bit more pedestrian.
As the market digested the odds of further RBNZ hikes and decided they were fading, the NZD lost some air and has been the worst performing of the majors, albeit in the context of its gains of 1-2% last week. Still, currency movements have been modest overall NZD/USD is down only 0.2% to 0.6140. With the AUD one of the better performers, edging up to 0.6540, NZD/AUD is down 0.4% to 0.9385, back to the level that preceded ANZ’s change in rate call on Friday, and after a push towards 0.9450. The NZD is down 0.1-0.3% on the other key crosses.
Bond and equity markets have been well contained overnight, with little newsflow to drive any significant change in pricing. The US 10-year Treasury yield sits at 4.16% after trading a 4.14-4.19% range overnight. European 10-year rates are slightly lower. The S&P500 is currently up 0.3%, extending its record -breaking run.
In the day ahead, focus will be on the US CPI print for January. An in-line or strong result would likely rule out a March rate cut by the Fed, but a surprisingly weak result would keep the faint possibility alive. The consensus sees a 0.3% m/m gain for the CPI ex food and energy measure, seeing the annual increase fall further to 3.7%. UK labour market data, including wages, will also be of interest.
Domestically, with increasing attention and differing views on the RBNZ’s next policy move, there will be greater focus on NZ data releases, even if second-tier. First up this week with be the RBNZ 2-year inflation expectations figure released this afternoon. Tomorrow will see REINZ housing data, card spending and monthly pricing indicators, followed by manufacturing PMI data and a speech by Governor Orr on Friday.
[chart;daily exchange rates]
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