Australian CPI, UK Budget and hawkish Bank of Canada all trigger market reactions. Global rates lower overnight. But NZ rates market caught up in Australian CPI aftermath, seeing further ramp up in yields

There has been a notable rally in the global bond market, sparked by a slashing of UK debt supply following the UK Budget and talk of month-end buying, with a hawkish Bank of Canada thrown into the mix. The US curve shows a significant flattening, with higher short rates and the 10-year rate down 8bps. CAD has outperformed, while the USD is broadly weaker, supporting a modest rise in the NZD.

It has been an action-packed 24 hours in rates markets that started in Australia and NZ, before moving onto the UK, European, US and Canadian markets. The Bank of Canada shocked the market, with an immediate end to its QE programme and bringing forward rate hike guidance into the “middle quarters” of next year. The change in view was driven by much higher inflation projections and, with inflation above the top of the target range and expected to stay there for some time, “the upside risks are of greater concern”. The market was already well priced for a series of rate hikes next year, but that didn’t stop a further lift in short-term rates, with the OIS market suggesting a first hike in Canada as early as March and the 2-year rate up 21bps to 1.08%. 

The UK Budget showed upgrades to revenue projections on a more positive economic outlook that allowed for more fiscal stimulus, cementing in expectations that the BoE would hike Bank Rate by 15bps next week to bring it up to 0.25%. The revisions to the fiscal projections allowed the DMO to surprisingly cut gilt supply for FY22 to £195b, down by a fifth from the April projection, easing concerns about the impact on the market when the BoE stops QE and halts reinvesting proceeds of maturing bonds. UK bonds rallied significantly after the announcement, with the 10-year rate falling 13bps to 0.98%.

This rally triggered much lower yields across the Europe and the US as well, with traders also pointing to month-end flows supporting the bond market. Germany’s 10-year rate fell 6bps to minus 0.18%, while the US 10-year rate is currently down 8bps to 1.53%, near its low for the session. There was a significant flattening of the curve, with the US 2-year rate up 5bps to a fresh 19-month high near 0.5%.

Australia became the latest country to report an inflation shock, with the trimmed mean measure up to a 7-year high of 0.7% q/q, putting core inflation near the top of its 2-3% target range when annualised, with plenty more inflation in the pipeline as the economy reopens. It was a wake-up call for the RBA, and those believing the RBA’s guidance, that conditions for a rate hike wouldn’t be in place until 2024. Pre the CPI print, the market was well-priced for a rate hike cycle to begin in the second half of next year, well ahead of RBA guidance, and the CPI print encouraged more rate hike pricing. The RBA didn’t expect core inflation to break above 2% until mid-2023 and its yield curve control policy, designed to keep the April-24 bond near 0.1%, must surely now be abandoned. The Australian 2-year swap rate surged by some 20bps and has made further gains overnight to be up 26bps to 0.91%.

Equities and currency markets have been uneventful by comparison. The S&P500 has been flat, hovering in and out of positive territory. The USD has been broadly weaker, although the BBDXY index is down barely more than 0.1% for the day. CAD has outperformed, following the hawkish BoC update, up 0.5% overnight. The AUD is barely higher, following the CPI shock and ramp up in rates, following the same playbook as the NZD over recent months, where local data and local policy expectations play second-fiddle to global forces. The NZD has pushed up to around 0.7180 and NZD/AUD is back to the pre Aussie CPI level of 0.9540, after a temporary move lower.

EUR and GBP are little changed against the USD over the past 24 hours and overnight, seeing NZD/GBP and NZD/EUR crosses a little higher.

In overnight economic data, US durable goods orders data fell in September, driven by aircraft and autos, but by less than expected and the core orders remained on a robust trend, consistent with a backdrop of strong business investment. The US goods trade deficit widened to a fresh record high of $96.3b in September, driven by a fall in 4.7% fall in exports.

There has been some better news on the global energy crisis overnight. Oil prices have fallen over 2%, after Iran and the EU agreed to restart negotiations on a revival of the 2015 nuclear accord, that could pave the way for increased oil supply from Iran. European gas prices are lower after President Putin ordered Gasprom to refill European gas storage facilities from early next month. China is also looking to limit the price miners sell thermal coal as it seeks to ease a power crunch that has resulting in a rationing of electricity supply.

NZ printed a record monthly trade deficit of $2.1b in September, taking the annual deficit to $4.1b, a far cry from the $1.7b surplus a year ago, a textbook widening for an over-stimulated, over-heated economy, with near-record commodity prices only proving to be a secondary offsetting factor that has helped support export values.

The ANZ’s business outlook survey for October showed a mild pull-back in activity indicators from the preliminary survey and, interestingly, the indicators are generally stronger for Auckland than the rest of the country, perhaps a sign that locked-down businesses see some light at the end of the tunnel. Inflation expectations surged ahead to 3.45%, not surprising considering the near-5% reading recently printed for the CPI. Costs and pricing indicators remain at extremely high levels.

The domestic rates market was rocked by the Australian inflation shocker, resulting in a significant curve flattening and higher rates across the board, reaching fresh highs for the cycle. The 2-year swap rate rose 15bps to 2.18% and the 10-year rate was up 10bps to 2.70%, with the same forces evident across the NZGB market. Overnight, the Australian 10-year bond future is down 5bps in yield from the NZ close, which should help the market open with a better tone.

The economic calendar is full for the day ahead. We don’t expect to see much new from policy updates from the BoJ and ECB. For the latter, the December meeting is shaping up to be a more crucial one for decisions on QE going forward. US Q3 GDP is expected by the market to show its weakest print in over a year, coming in at an annualised 2.6%.