Risk appetite weaker on poor China economic data but a recovery has ensued. US equities now modestly higher after earlier weakness in futures markets. Global food price inflation rising

Some poor China economic data set the scene for a risk-off vibe to start the new week, with weaker US equity markets, lower global rates and the NZD weakening towards 0.62 before a significant turnaround overnight ensued. The US S&P500 now shows a modest gain and the NZD has recovered strongly to break up through 0.63.

April monthly activity data for China were much worse than the market estimated, with lockdowns proving to have a much greater impact on economic activity. Retail sales slumped over 11% yoy. The industrial side of the economy hasn’t been as affected as much as the consumer, but a 2.9% y/y fall in industrial production is very weak by China’s standards. There is some optimism that an imminent end to Shanghai’s lockdown and the easing of restrictions in many other cities will support a rebound in economic activity, but community spread of Omicron could easily re-emerge at any given time and send areas back into lockdown. Until China abandons its zero-COVID policy, which seems unlikely given the political capital President Xi has staked on continuing it, then storm clouds will remain over China’s economic outlook.

Overnight, the US Empire State manufacturing index unexpectedly plunged to minus 11.6, well below the expected level of +15. While the index is now at a post-COVID low, its recent volatility means not too much should be read into it, with the plunge just as surprising as the unexpected surge to 24.6 the previous month.

Fed speakers will remain out in force this week and overnight NY Fed President Williams endorsed Chair Powell’s view, saying that the plan to enact 50bps rate hikes at the next two meetings “makes sense”, as the Fed moves rates “expeditiously over this year back to more normal levels”. He said that the risk he was most focused on was “what happens if inflation stays higher than expected”.

The weak China economic data sent risk appetite lower yesterday afternoon, with S&P futures falling over 1%, the US 10-year rate falling about 5bps to 2.88% and the NZD falling from around 0.6290 to 0.6230, with the AUD showing a similar sort of move.

There has since been a decent recovery. US equities have had a choppy trading session and, after spending most of the session in negative territory, the S&P500 index currently shows a modest increase. The NZD has recovered strongly up through 0.63 while the AUD has recovered to 0.6980.  By contrast, the US 10-year rate pushed even lower overnight, down to 2.85%, and is currently back at 2.88%, down slightly versus the NZ close.

All commodity currencies show a strong recovery from yesterday’s low, with commodity prices on the rise. Oil prices are up 3-4%, with both the WTI and Brent crude benchmarks on a USD113 handle. US gasoline futures rose above $4 a gallon for the first time ever, with one trader noting that the squeeze on refined products is pulling crude oil prices higher. Record US gasoline prices ahead of the summer driving season will add to the squeeze on the consumer. Expectations that demand for China will increase as lockdown restrictions ease might also be supporting oil prices. Furthermore, Germany said that it plans to stop importing Russian crude by the end of the year even if the EU fails to agree on coordinated action.

Wheat prices continue to surge, with another gain of 5.9% after India moved to restrict exports. Prices are now up 65% for the year to date and this can only add to the pressures on global food inflation for the rest of the year and into next year.

Yesterday, the domestic rates market showed another day of falling rates, helped by the backdrop of the weak China data. NZGB yields were 3-4bps lower across the curve, with the 10-year rate down to 3.58% compared to a peak of 3.82% a week ago. The 2-year swap rate fell 3bps to 3.52%, well down from the near 4% level reached just over a week ago, while 5-10 year swap rates fell 6-7bps. Focus is turning to next week’s RBNZ MPS, where the Bank is widely expected to deliver another 50bps hike, but with a rate track that doesn’t extend to as high as the market has been recently pricing.

In the day ahead, the RBA minutes of the May policy meeting will be released, a meeting in which the Bank kicked off the tightening cycle. The key economic release tonight is US retail sales, which is expected to show a lift of 1.0% m/m in April, which is small when adjusted for strong price gains.  Separately, the ECB’s Lagarde and Fed Chair Powell will be speaking.