Friday saw sharp falls in global rates as recession fears returned to markets. The European composite PMI fell below 50, signaling negative growth in the region, while the US services PMI also fell into contractionary territory, leading markets to aggressively cut rate hike expectations. Stocks fell on recession worries, with technology stocks underperforming on worries about online ad spending. The big driver in the currency market was the yen, which appreciated nearly 1% amid sharply lower global rates and more cautious risk appetite. The NZD briefly touched 0.63 on Friday night, the first time in nearly a month, before ending the week around 0.6250. New Zealand rates fell sharply on Friday, with the market now pricing in “only” a 30% chance of a 75 basis point rise in the RBNZ next month, and those moves are likely to continue this morning.

Economic data returned to the forefront of investor attention on Friday night after a series of very weak PMI surveys in the United States and Europe. Germany’s services and manufacturing PMI fell below 50, signaling contraction in both sectors, while Europe’s composite PMI rose from 52 to 49.4, the first time it has been reported. fallen into contraction territory (excluding Covid-related lockdowns) since 2013. The European composite PMI is consistent with the Eurozone economy contracting at a rate of 0.1% q/q. It is not difficult to understand the slowdown in growth momentum given the sharp rise in energy prices in Europe this year (and fears of possible rationing before winter), the war in Ukraine and lower global growth. To add to this, the ECB kicked off its tightening cycle this week, with President Lagarde saying on Friday that it “raise interest rates for as long as it takes to bring inflation back to our target.” The ECB formed with ill-timed rate hikes, sadly raising rates on the eve of Lehman Brother’s collapse in 2008 and again just before the European sovereign crisis in 2011.

European rates plunged after the PMI release, with the market aggressively cutting expectations for an ECB rate hike just a day after the central bank’s bigger-than-expected 50 basis point hike. The market still expects a 50 basis point hike in September, but it now only expects about 75 basis points of additional hikes thereafter. The German 2-year rate fell 26 basis points on the day to 0.36%, while the 10-year rate, which had peaked at 1.94% just over a month ago, plunged 19 basis points, dropping below 1% at one point. There was a temporary respite for Italy after the recent political drama in the country, as the Italian 10-year bond rate fell 23 basis points.

Later in the session, the US composite PMI fell from 52.3 to 47.5, well below expectations and now at its lowest level since 2009 (excluding early 2020 period). S&P Global, which now administers the index, said more companies reported cost-cutting and downsizing plans, in line with recent anecdotes from big tech companies such as Meta and Apple, even as the gauge d employment remained firmly above 50. More encouragingly, there were further declines in the price gauges, with the producer price index hitting its lowest level since March 2021, potentially a sign that inflationary pressures may be easing. mitigate. The market agrees with this view; it projects annual CPI inflation to fall to just 2.75% by the end of 2023, which would be a huge drop from the current rate of 9.1% year-on-year.

Usually, the market tends to give more weight to ISM surveys in the United States, which have a longer history than PMIs. But, with recession fears already heightened, there was a significant market reaction to the data. US 2- and 10-year yields fell 12 basis points on the session, with the latter now near their lowest levels since April, sitting at the bottom of the trading range around 2.75%. The Fed is still expected to raise its policy rate by 75 basis points this week, but the market now sees a 50 basis point hike in September as the most likely outcome (previously 75 basis points) and a peak in the policy rate below 3.50%. Additionally, the market is forecasting nearly three rate cuts in 2023, in line with the view that the economy is likely to enter a recession and inflation should slow rapidly. Market positioning may also be in play with the aggressive rally in the bond market, with short duration (betting higher rates) having already been a widely held consensus, although with some signs from the investor survey of JP Morgan indicating that investors have been buying back bonds in recent months.

US stocks fell after US PMI data, with the S&P500 ending nearly 1% lower and the NASDAQ down nearly 2%. Adding to negative sentiment towards tech stocks, Twitter and Snap posted disappointing results, with the latter plunging nearly 40% and spilling over to other social media and tech companies, such as Meta (-7.6% ) and Google parent company Alphabet (-5.8%) as investors wondered whether this could signal a broader slowdown in online ad spending by businesses amid a slowing economy. It’s a big week ahead in earnings season with Apple, Amazon, Meta and Alphabet all reporting.

Despite growing recession fears evident in other markets, the S&P500 and NASDAQ were up on the week (+2.5% and +3.3% respectively), with the most likely explanation being a technical correction in oversold levels rather than a more optimistic fundamental outlook.

Currencies were volatile on Friday, but with little net change other than the JPY. The Euro was skewed by economic data, falling to 1.0130 after the dire European PMIs before rebounding from the equally weak US surveys. The euro ended little changed on the day, just above 1.02. The JPY was the main driver of the currency market, with USD/JPY falling almost 1% to around 136 as the sharp drop in US bond rates narrowed the interest rate differential between Japan and the US. -United. The NZD hit 0.63 on Friday night for the first time in nearly a month before falling back to 0.6250, little changed on the day. The story of the week was for USD weakness (BBDXY -1%), albeit after what was a very strong run that saw it hit multi-year highs.

Separately, Russia and Ukraine have signed an agreement to allow grain shipments from Ukraine to pass through the Black Sea. US wheat futures plunged nearly 6% and are now trading below levels seen just before Russia invaded Ukraine. Note Russia has since raided the Ukrainian port of Odessa, casting doubt on whether the deal will hold. Food prices have been one of many factors contributing to skyrocketing inflation around the world.

Falling global bond rates ricocheted off the New Zealand market on Friday, sending swap rates down 7-10 basis points across the curve. The market started to reduce expectations for RBNZ rate hikes in line with the trend in offshore markets. The market now sees around a 30% chance of a 75bp rise in the RBNZ next month, up from more than 50% immediately after New Zealand’s higher-than-expected CPI was released earlier this week. last. The market is poised for further significant New Zealand rate cuts today, with the implied yield on the Australian 10-year bond futures contract around 15 basis points lower than at the close of the New Zealand market.

Not much on the agenda tonight, just the IFO survey of German companies, although market interest is likely to be limited given the most-watched PMIs were released on Friday. .

Beyond tonight, it’s another big week ahead offshore. The centerpiece is Thursday night’s FOMC meeting, the Fed now expects it to hike its cash rate by 75 basis points for the second meeting in a row, although the focus is likely to be on how whose President Powell outlines the policy outlook amid the downturn. in activity indicators. US GDP is released in the US, with the market looking for moderate quarterly growth of just 0.5% (annualized). Note that the Atlanta Fed’s GDPNow estimate points to negative growth in the second quarter, which would see the US entering a “technical recession”. Probably the most important US data point is Friday’s employment cost index, the most comprehensive measure of wage growth. Elsewhere, Australia is seeing the all-important CPI release, with the market expecting headline annual inflation to hit 6.3% and core inflation to hit 4.7% y/y, well above the top of the RBA’s 2-3% target range. Domestically, the ANZ Business and Consumer Confidence Indexes were released, with both likely to show that confidence remains depressed.