RBA raises cash rate by a larger-than-expected 50bps. Short-term Aussie rates blast higher while NZD/AUD cross falls below 90 AUc

There has been little fresh news overnight to drive markets, with investors waiting for the ECB meeting and US CPI data later this week.  Global 10-year rates have reversed most of their sharp move higher over the long weekend, the US 10-year rate now back below 3%, while US equities have managed modest gains.  The pullback in rates hasn’t done much to support the JPY, with USD/JPY hitting a fresh 20-year high of 133 overnight.  Meanwhile, the RBA raised rates by a larger-than-expected 50bps yesterday, leading to a big move higher in Australian short-term rates and driving the NZD/AUD cross below 0.90.

After their big move higher on Monday night, global bond rates have reversed lower overnight.  The US 10-year rate, which was trading above 3% yesterday, has fallen 7bps on the session, to 2.97%, while Germany’s 10-year rate was 3bps lower.  There hasn’t been much change in central bank rate expectations over the past 24 hours, with shorter-term rates little moved, but demand for longer-term US bonds appears to have returned, at least for now, with the 10-year yield hitting the psychologically important 3% mark.  There hasn’t been any major economic data or central bank talk to drive markets overnight.  Italy has been the star performer in the bond market overnight, its 10-year rate falling 13bps as the market digested the FT’s earlier report that the ECB would set up a backstop bond buying facility for times of stress in peripheral government bond markets.

Equity markets have struggled for direction overnight amidst a lack of major news.  The S&P500 and NASDAQ are both around 0.5% higher, following a 0.2% fall in the EuroStoxx 600 index.  The pullback in longer-term rates has provided some support to equities.

US major retailer Target issued its second profit warning in three weeks, citing unwanted inventory levels, which it is needing to discount to clear, alongside transportation costs and fuel prices.  Target and Walmart’s grim profit outlooks a few weeks back spooked the market, fuelling talk of a major slowdown in consumer spending.  Target’s share price, which collapsed 25% after its initial earnings report a few weeks back, was down a relatively modest 3% overnight.  Walmart is in a similar situation, with its head of operations saying on Friday that it would take “another couple of quarters ” to manage down excess inventory levels which have built up as consumers have switched spending away from discretionary goods items and back towards services and consumer staples.

In China, Beijing reported no new Covid cases for the fourth day running while, less encouragingly, there were another four cases reported outside quarantine facilities in Shanghai, something to keep an eye on given the ever-present risk of another Omicron outbreak.

In currencies, the pullback in US Treasury yields hasn’t done much to support the JPY, with USD/JPY extending its recent rally, pushing up to a fresh 20-year high of 133 at one point overnight, now 0.5% higher on the day.  The broader USD is little changed overnight.  The AUD (+0.4%) has outperformed modestly on the back of the RBA’s 50bps rate hike (see below) while the NZD is little changed from this time yesterday, still hovering just below 0.65.  The GBP has been another outperformer (+0.4%), with UK PM Johnson surviving his party’s confidence vote, as expected, but this having little bearing on markets.

Yesterday, the RBA completed its transition from dovish laggard to the 50bps rate hike club, joining the RBNZ, Fed and Bank of Canada.  While a rate hike was always seen as a certainty, the 50bps size, which takes the cash rate to 0.85%, was a surprise.  Only three economists were calling for such a move and the market was pricing ‘only’ 33bps heading into the meeting, although there was a significant minority of economists expecting a 40bps hike.

The 50bps hike marks a major turnaround from late last year when the RBA was still saying that rates would be on hold until at least 2024, a lesson not to place too much weight on central banks’ longer-term forecasts.  Looking ahead, the RBA said it “expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead ”, signalling a high chance of a follow-up 50bps hike(s) in the coming months.  The market is pricing around 40bps into each of the next five meetings this year and a terminal cash rate of around 3.8% next year.  Australia’s 3-year bond rate blasted 15bps higher to 3.13%, its highest close since mid-2013, while the yield curve flattened aggressively, the 10-year rate up only 7bps.

Off the back of the RBA meeting, the NZD/AUD cross has broken below the 0.90 mark, touching its lowest level since mid-2018.  The relentless downtrend in the cross, which was above 0.96 as recently as December, mirrors the convergence in NZ-AU short-term interest rate differentials, with the relative outperformance of Australian commodity prices another tailwind behind the decline in the cross.

NZ rates were higher and steeper yesterday, following the global trend over the long weekend.  The 2-year swap rate was 3bps higher, at around 3.90%, while the 10-year rate was 7bps higher, at 4.07%.  Rates will open higher this morning off the back of the post-NZ market close moves in Australian rates following the RBA meeting.

There is little on the agenda over the next 24 hours with markets likely to tread water ahead of the key risk events later this week, namely the ECB meeting on Thursday night and US CPI on Friday night.