Risk sentiment is weaker, with hope fading for a US-Iran peace deal, higher US CPI inflation, bubbling political risk in the UK and a chunky fall in semiconductor stocks all weighing. US and European equity markets are lower, global rates are higher, oil prices are higher and the USD is broadly stronger.
There have been no fresh developments in the Middle East conflict, with no sign of any progress on a peace deal and the Strait of Hormuz remaining effectively closed. Brent crude is up for a third consecutive day, trading above USD108 overnight.
US CPI inflation picked up in April, with figures coming in at the higher end of expectations. Annual headline inflation rose to a three-year high of 3.8% y/y, with higher gasoline prices contributing about 40% of the 0.6% m/m increase and higher food prices also evident. The core measure which excludes food and energy rose 0.4% m/m and 2.8% y/y. Higher rents made a significant contribution, but this was technical in nature, capturing a “catch-up” impact after the BLS had assumed zero increases during the federal government shutdown late last year. Still, even excluding this impact, core services inflation showed a notable 0.5% m/m increase.
Chicago Fed President Goolsbee, speaking after the release, said if high services inflation indicated that the underlying economy is overheating “then the Fed has got to be thinking about how do we break the chain of escalating inflation…we’ve got an inflation problem in this country and we’ve got to get it back down”. Clearly, we can add Goolsbee to the list of Fed Presidents who are sceptical of the Fed’s implicit easing bias.
The higher inflation print added to the prevailing upside pressure in US Treasury yields. The 2-year rate is up 4bps to 4.00% and the 10-year rate is up 5bps to 4.46%, both approaching the late-March highs.
European rates are also higher across the board while UK Gilts continue to underperform, with the 10-year rate up 10bps to 5.10%. The 30-year rate traded as high as 5.81%, a level not seen since 1998, due to rising UK political risk. PM Starmer vowed to fight on as PM in the face of mounting pressure for him to resign. Prediction markets give an 83% chance that Starmer won’t be PM before the end of the year. A leading contender to replace him, current Manchester Mayor Andy Burnham, needs a Labor MP to resign to force a by-election for him to be in a position to seek the PM position. All this will take time.
Risk sentiment has driven a broadly stronger USD. While most FX movements have been modest, a rising political risk premium has seen GBP notably underperform, down 0.7% from this time yesterday to 1.3530. NZD/GBP reached a two-month high just above 0.44 overnight. NZD/USD shows only a small fall to 0.5950 and apart from the noted gain against GBP, other cross rate movements are small.
There was some JPY volatility on a suspected “rate check” just after the NZ close but the move wasn’t sustained. US Treasury secretary Bessent met with Japan’s PM and Finance Minister. FM Katayama said, “we agreed that we are co-ordinating extremely well on recent market moves, including exchange rates”. Bessent told reporters he had not made a request to PM Takaichi on monetary policy. Last year, Bessent indicated a preference for higher rates rather than currency intervention.
Australia’s “anti-Boomer” Budget didn’t elicit any notable market response, with most of the key policy measures having been pre-released. This included the increase in capital gains tax, making it one of the highest in the world with a minimum rate of 30%, higher taxes for discretionary trusts and the clampdown on the use of negative gearing for property investment.
In the domestic rates market, global forces put upside pressure on yields across the curve, alongside lingering payside pressure in short-end swaps. The 2-year swap rate rose 6bps to 3.63%, a fresh closing high for the cycle, while the 10-year rate rose 4bps to 4.37%. NZGBs showed similar moves. The OIS market now sees the May meeting as an even bet for a 25bps rate hike, and with two rate hikes fully priced by September. The Australian 10-year bond future is up over 5bps in yield terms since the NZ close.
In the day ahead, Australian wages data and the RBNZ survey of expectations are released. The latter could show rising inflation expectations across all measures, the question being whether they lift enough to spook the RBNZ. Tonight sees the release of US PPI inflation data, expected to show a further lift, with an annual headline rate of 4.8% and core rate of 4.3%.
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Jason Wong is the senior Markets Strategist at BNZ Markets.
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