US stocks stronger against grain from other markets. Inflationary surprises in the UK and Canada as well as rising energy prices are pushing global rates up. Negative news from China continues to pour in
US stocks rebounded overnight after a risk-averse trading session in Asian and European time zones. After lower US inflation in the previous night’s session, UK and Canadian inflation surprised positively and higher oil and gas prices added to an inflationary picture, leading to higher rates global. Currency markets were well contained with only the oil-sensitive CAD and NOK showing many signs of life. The NZD remains stuck around 0.71.
After falling for six of the last seven sessions, the S & P500 has rebounded 0.8%, perhaps a sign of the buying squad intervention of the downside, a regular feature of the market, which has only experienced only small declines since the end of last year. Admittedly, there is nothing obvious on the fundamental side that seems to have triggered the recovery. Almost all sectors participated in the rebound, with only utilities in the red amid rising bond yields.
After going to bed last night, one might have half expected a weak US session, with struggling futures and weaker equity markets in Asia and Europe. The Euro Stoxx 600 index fell 0.8%, with all key markets falling and key Asian markets falling between 0.5-1.8%.
All the news from China recently has been ostensibly negative, with another COVID19 outbreak centered in Fuijian province, widespread lockdowns causing a slowdown in economic activity, regulatory crackdowns across a wide range of sectors ( with casinos added to the mix overnight), and the risk of a contagion effect in the real estate market, with the possible looming collapse of the Evergrande group after Chinese authorities told the firm’s major lenders not to expect interest payments due next week on bank loans.
Activity data in China for August was weaker than expected overall, with retail sales growth of just 2.5% year-on-year being particularly weak. The sluggish growth has been attributed to widespread lockdown restrictions to contain the spread of the delta variant of COVID19. The further spread of the virus in Fujian province will also slow activity in September, and many are no doubt anticipating a decline in Chinese GDP growth in the third quarter and extending into the fourth quarter, adding to the nesting narrative. hen of global recovery.
UK CPI data was stronger than expected, with overall rates and base rates breaking through the 3% mark. The BoE expected headline inflation to peak at around 4% by the end of the year before falling back as special factors drove the inflationary surge. However, the data bolstered market expectations for rate hikes next year, forecasting a 15bp hike in the bank rate to 0.25% in May, followed by a 25bp hike in November. Recall that last week Governor Bailey told Parliament he was one of four MPC members who believed the minimum criteria for a stricter British monetary policy had been met even though he did not consider that ‘there were sufficient grounds for pushing for a stricter policy immediately.
Inflation data in Canada was also stronger than expected, with the annual headline rate rising over 4% in August to an 18-year high and the average of the three basic measures on which the Bank of Canada is focused to increase to 2.6%, a 12-year high. The data supports the view that another reduction in asset purchases is expected next month, while the market expects the first rate hike in the third quarter of next year.
Oil prices rose about 3%, with Brent crude surpassing $ 76 a barrel overnight after the EIA reported a larger than expected 6 million barrels drop in U.S. crude inventories, the leading to their lowest level in two years. US production was recently held back during the hurricane season. The market is also closely monitoring the surge in electricity and natural gas prices in Europe, where some prices have reached record levels. These forces on energy prices add to the current inflationary environment, providing assistance to those who do not fully subscribe to the ‘transitional’ view of inflation or to those who argue that we are heading for a period. of “stagflation”.
In this inflationary environment, global rates are rising, with European 10-year rates up around 4bp and the US 10-year rate up 2bp to 1.30% (trading up to 1 , 32% overnight), reversing about half of the observed decline. following weaker US CPI figures from the previous session.
Currency markets have been relatively calm. The oil-sensitive NOK and CAD topped the rankings overnight, up 0.7% and 0.3% respectively, but other currency movements were 0.2% or less per against the USD. The USD is weaker overall, but not by much, with the BBDXY index falling less than 0.2% for the day. After dipping to 0.7075 during the local trading session, the NZD regained the 0.71 level overnight as this level was a magnet for trading over the past week. The AUD is slightly higher at 0.7325. The NZD / AUD settled just below the 0.97 mark.
New Zealand bonds outperformed yesterday, with yields pulled lower following the successful issuance of the new 30-year bond the day before, with high spreads against global markets attracting interest overseas. The curve flattened, with longer-term NZGBs falling in the range of 9-10 basis points, and smaller declines of around 4-5 basis points for 3-4 year maturities. . NZGB yields fell more than swap rates, with 10-year swaps “only” falling 4 basis points to 2.06%. The 2-year swap rate closed 1bp higher to a new high of 1.40%, ahead of a likely series of RBNZ rate hikes in the coming months.
In the coming day, New Zealand GDP data for the second quarter will be released. Although the numbers are dated, the consensus stands at 1.1% q / q with some estimates reaching 1.7%, well above the RBNZ’s choice of 0.6%. Therefore, the data is likely to suggest a more positive output gap and higher underlying inflationary pressure just before the latest COVID19 outbreak. Even though we know that growth in the current third quarter will be disastrous, due to lockdowns a strong rebound thereafter would add to the feeling that OCR needs to go much higher, adding to the conviction for rate hikes to come. .
Australian employment data will be skewed by the country’s foreclosure and therefore have limited value. The US retail sales data release tonight is expected to be stable at baseline and with weaker auto sales pushing overall growth into negative territory.