The NZD hits a new 2-year low. New Zealand rates market shows recovery after statement
The night was quite eventful, with a strong upside surprise in US CPI inflation and a surprise 100 basis point hike by the Bank of Canada. Despite some intraday volatility, most net market moves do not look unusual, with US equities flat and currency swings modest. The USD and JPY are generally weaker. The euro very briefly traded below parity before recovering. The NZD hit a new 2-year low at 0.6081 before rising to 0.6140. More interestingly, the US yield curve flattened considerably further, with the 2-10 second gap narrowing to minus 23 basis points.
There was a lot of anticipation in the build-up to this week’s key event, the US CPI release, and it certainly lived up to the billing. The US CPI jumped in June with a strong 1.3% m/m increase taking the annual increase to a new four-decade high of 9.1%. And it wasn’t just caused by soaring gasoline and food prices, with the core measure rising 0.7% m/m and 5.9% y/y. Inflation showed no sign of abating, with goods inflation remaining strong and services inflation accelerating across the board, a clear sign of an overheated national economy. Alternative measures of core inflation showed signs of inflation accelerating over the month, with the Cleveland Fed’s cut median and average measures and the Fed’s sticky CPI measure of Atlanta all posting higher monthly increases than previously.
The strong inflation data prompted the Fed to do something. It is too late for monetary policy to have a significant impact on short-term inflation, but it will have to get inflation expectations under control and optics are key. With the top of the fed funds range still only at 1.75%, the market has been heading for a more than likely 100bp higher price later this month, followed by another large move closer to 75bps in September. Atlanta Fed President Bostic spoke after the release and said June’s CPI was concerning and “it’s all in the balance” when it comes to the July meeting.
Market prices for a 100 basis point move rose after the Bank of Canada shocked the market by raising 100 basis points itself, a bigger move than the widely anticipated 75 basis points. The statement noted: “With an economy clearly in excess demand, high and expanding inflation, and more businesses and consumers expecting high inflation to persist for longer, the Governing Council has decided to accelerate the path to higher interest rates”. Governor Macklem said that by raising interest rates early in the period, the Bank was trying to avoid the need for even higher interest rates in the future.
Earlier in the session, UK activity data was much stronger than expected, with GDP up 0.5% m/m, with surprising strength led by the manufacturing and construction. The data suggests that the economic recession may not have started yet and adds to the possibility that the BoE will deliver a 50 basis point hike next month, following a string of 25 basis point hikes. Overnight events make next week’s ECB meeting all the more interesting, with President Lagarde previously guiding for a 25bps hike, but a bigger 50bps move looks the biggest risk. Market prices rose a little, but still with only 31 basis points of price increases.
Markets were volatile in major releases from the US CPI and the Bank of Canada. US Treasuries yields initially soared across the board, but a more aggressive acceleration in increases eventually pushed longer-term rates lower. Currently, the 2-year rate sits at 3.14%, up 9 basis points on the day and the 10-year rate is at 2.91%, down 6 basis points, a noticeable flattening of the curve that sees the 2s10 gap at minus 23 basis points, providing a stronger signal of economic recession ahead.
The S&P500 fell more than 1.5% at the open before recovering and the index is currently showing a slight gain, alongside the Nasdaq index.
The USD initially rallied before reversing its course, with the Dollar now posting losses for the day against all major currencies except the Yen. The BoJ looks even more like an outlier in this crazy world with its ultra-dovish policy stance and even though the US 10-year rate is lower, USD/JPY pushed higher to 137.30.
The BoC’s surprise hike had a fairly muted impact on the CAD, with USD/CAD down just 0.4% for the day at 1.2965. The Euro fell just below parity at 0.9998 following the US CPI release, but has since recovered to 1.0065. The NZD traded at a fresh 2-year low at 0.6081 but has since recovered to 0.6140. There was no notable movement on the NZD crosses; NZD/JPY is the biggest move of the day, up 0.5% to 84.3.
Yesterday, the RBNZ offered a ‘no surprises’ monetary policy review, offering another 50bps hike in the OCR to 2.5% and indicating comfort with its OCR projections in the May statement. which showed OCR heading towards around 4%, well above neutral, before falling back. Earlier in the day, data from REINZ showed the damage the policy tightening was doing to the housing market, with home sales falling 38.1% year-on-year in June and the house price index falling. down 9.5% from the peak in November.
The NZD barely moved after the RBNZ announcement as wholesale rates fell as there had been a slim chance of a 75 basis point price hike and the short-term market trajectory changed. been more aggressive compared to RBNZ projections. The passage of another risk event could also have been a factor. Trading conditions were then choppy, with a significant drop in rates subsequently reduced. On that day, the 2-year swap rate closed 4 basis points lower at 3.88% while the 10-year rate fell 5 basis points to 3.80%, with similar moves. observed for NZGBs.
In the day ahead, Australian employment is expected to post a solid increase of 30,000 in June, which would push the unemployment rate down to 3.8%, reinforcing the need for the RBA to continue to tighten policy. US PPI inflation will continue to show plenty of inflation in the pipeline.