Weaker US consumer confidence rocks US equities. US Treasury yields little changed. European rates higher on tough talking ECB

Risk appetite has deteriorated, not helped by a weaker US consumer confidence print. US equities are down 2-3% while the USD is broadly stronger. The NZD is the weakest performer overnight, falling below 0.6250. European rates are higher on hawkish ECB-speak while UST yields are relatively steady.

US equity markets opened stronger but then got whacked by a reality check after some weak economic data and the S&P500 is currently down 1.8%% with the Nasdaq index down 2.6%. The Conference Board measure of consumer confidence fell by more than expected to 98.7, all driven by the expectations component, the latter falling to its lowest level in nearly a decade. Unlike the University of Michigan version, consumer confidence remains well above record lows, but it is yet another disappointing indicator that plays to the risk of a developing economic recession ahead. The survey report said that the fall in confidence was driven by increasing concerns about inflation, in particular rising gas and food prices.

In addition, yet another regional manufacturing survey disappointed, with the Richmond Fed index down to minus 19 and the new orders component slumping to minus 38. All roads lead to a weaker ISM manufacturing index at the end of the week and below the consensus reading measured at the start of the week. On a more positive note, the US goods trade deficit narrowed in May to $104b and indications point to a positive contribution of net exports to Q2 GDP, after a wider deficit was responsible for dragging Q1 GDP into negative territory.

The US Treasuries market wasn’t particularly perturbed by the weak data, with the 2-year rate tracking sideways at 3.12% while the 10-year rate is little changed from the predata level and sits at 3.20%, flat on the day and up 2bps from the NZ close.

NY Fed President Williams said that the Fed would be discussing whether to raise rates by 50bps or 75bps at the July meeting, with the decision driven by economic data, consistent with Chair Powell’s view. He noted he had one of the lowest forecasts amongst committee members for GDP growth to slow this year, to 1-1½%, “…but that is not a recession”. He had a lot of confidence in needing to get the Fed Funds rate up to 3-3½% this year, while next year was more data dependent and 3 ½-4% “was a good starting point”. These figures are consistent with the median projection of the FOMC

European 2 and 10 year rates are higher, with Germany’s 10-year rate up 8bps to 1.62%. Yesterday we noted the big swings in this rate last week and the volatility is continuing this week. ECB President Lagarde reiterated the message from the last policy update that the central bank needed to act in “a determined and sustained manner” to bring inflation down, reaffirming the intention to hike policy rates by 25bps in July and a 50bps move in September unless there is a rapid improvement in the inflation outlook. While we await details on the ECB’s new tool to combat fragmentation in the euro area, the flexibility on reinvestments of maturing bonds from the pandemic bond-buying portfolio can begin from July.

There seemed to be more market reaction to Belgium’s central bank Governor Wunsch who made the case for a quicker pace of policy tightening, suggesting that the next 200bps of rate hikes “are a no brainer for me…I think we need to do it relatively fast. Such a move is priced in by next March”.

In currency markets, the USD is broadly stronger, with some trader talk about USD buying requirements ahead of month-end, although CAD and AUD have held up well. Oil prices are up about 2% with ongoing chatter about tight supply conditions and some boost in demand from looser COVID restrictions in China. China reduced quarantine times for inbound international travellers to ten days (of which only seven will need to be spent in a hotel quarantine facility) from 21 days. The AUD rallied about 40pips on that China news to over 0.6960 but has since fallen back to 0.6915, only down slightly from this time yesterday.

By contrast, the NZD has fallen further, down 0.7% overnight to 0.6240, with NZD/AUD dragging down to 0.9030. The NZD is weaker on all the key crosses. There doesn’t seem to be any specific reason for its overnight underperformance, but we can point to a long list of macro headwinds currently facing the currency.

Despite the hawkish ECB rhetoric, EUR is down 0.4% overnight to 1.0520, unwinding its rally the previous session. The IEA said that Europe will need to cut as much as 30% of its gas consumption by mid-February if flows from Russia are halted and that Europe should focus on cutting gas use from industry and households now to ensure as much supply as possible is going into storage.

GBP and JPY haven’t performed any better against the backdrop of broad USD support. Even with weak risk appetite and steady UST yields, USD/JPY is back up through 136.

The domestic rates market continued to be swayed by global forces, showing upside pressure on yields from the open in response to the previous night’s chunky global moves before a rally in Australian bonds spilled over and drove rates back down. The net result was NZGBs closing the day about 2bps higher across the curve. The swaps market showed a steepening bias, with 2-year swap up 2bps to 4.16% and 10-year swap up 6bps to 4.19%.

The economic calendar remains fairly light, with the key release tonight being Germany CPI, which has skyrocketed recently. The consensus sees another nudge up in the annual change to 8.8% y/y. At the ECB’s symposium, all the heavy-hitters will be speaking tonight, including Powell, Lagarde and Bailey