Global equity markets struggled to gain traction as investors look ahead to key central bank meetings this week. The S&P fell 0.7% while major European indices were little changed. In Asia, the Hang Seng fell nearly 1.5% following weak house price data from China and the PBOC’s decision to leave rates on hold and withdraw liquidity. US treasuries ended modestly higher in yield and the US dollar was stable.
University of Michigan consumer sentiment was slightly softer than median expectations but is still consistent with resilient consumption growth. Separately, consumers five-to-10-year inflation expectations were stable at 2.9%. This level remains higher than before the pandemic, but can be expected to retrace, as actual inflation falls. There was a large drop in the Empire manufacturing survey, but this is a volatile series and only has a small geographical coverage. More regional surveys are required to provide a better gauge of the national backdrop for manufacturing.
The biggest union group in Japan announced larger than anticipated annual wage rises, which increased expectations that the Bank of Japan (BOJ) will raise rates, for the first time since 2007 on Tuesday. A Nikkei article suggested the BOJ is going to raise rates to 0-0.1% and end curve control, which theoretically caps 10y JGB yields at 1.00%. The market response was limited with the yen ending weaker in the offshore session.
The PBOC held its one-year medium-term lending facility rate (MLF) at 2.50%, which was in line with the consensus, although a minority had anticipated a 10bps cut. The MLF has been maintained at current levels since a 15bps cut in August last year and is likely aimed at keeping the yuan stable. The housing market could do with support from lower rates – prices fell in major Chinese cities in February – as the property downturn deepened.
US treasury yields extended higher on Friday. 2-year yields ended up 3bps at 4.73% while 10-year yields are 2bps higher at 4.31%. Yields are more than 20bps above the level at the start of last week, amid concerns about sticky inflation, which could impact the amount of easing that policy makers will signal at the upcoming FOMC. Market pricing for the first 25bps Fed rate cut has been pushed back to July.
The US dollar was little changed. Amongst the majors, EUR/USD was stable while USD/JPY moved higher. Expectations of an imminent BOJ policy adjustment seems to be well priced for now. CFTC data revealed speculative yen short positions were reduced last week albeit while remaining at elevated levels. NZD/USD extended below 0.6100 before stabilising ahead of the March lows near 0.6070. NZD/AUD reached the lowest level in 6-weeks below 0.9300.
NZ yields moved higher in the local session on Friday reflecting moves in offshore markets. 10-year government bonds ended 5bps higher at 4.70% and the curve steepened modestly. Australian 3-year and 10-year bond futures are ~1bp higher in yield since the local close on Friday suggesting limited directional bias for NZ yields on the open.
The NZ Performance of Services Index (PSI) is the only domestic data of note today. The manufacturing index (PMI), improved in February, though remained marginally in contractionary territory. China monthly activity data covering retail sales, industrial production and investment will be closely monitored. PMIs surprised to the topside however property remains a major drag, raising doubts about policymaker’s ambitious 5% growth target.
[chart;daily exchange rates]
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