Risk appetite appears weaker on increasing global recession fears. Chunky falls in global rates, commodities broadly weaker and NZD and AUD underperform

US equity futures fell during Asian trading, but after a weak open, the S&P500 has managed to recover back into positive territory. The bond market showed no signs of turnaround, with lower rates through Asian trading extending overnight and UST yields currently showing meaty falls for the day. The AUD and NZD have been the weakest performers over the past 24 hours. NZD has recovered to just under 0.63 after falling below 0.6250 overnight.

Risk appetite appears weaker when viewed from the perspective of bonds, currencies and commodities.  Recession fears rather than inflation concerns have sent global rates on a lower trajectory, with Germany’s 10-year rate down 14bps to 1.63% and the US 10-year rate down 13bps to 3.15%. Monetary policy tightening expectations have been pared back, evident in widespread falls in 2-year rates, with the US 2-year Treasury down 13bps.

Over the past 24 hours, the NZD and AUD have been the weakest performing of the majors. The NZD fell steadily through the Asian trading session by nearly a cent to a low of 0.6244, before recovering to currently sit just under 0.63. The AUD fell steadily to below 0.69, before recovering to 0.6940. EUR has performed better, heading towards 1.06 and sending NZD/EUR down about 1% to 0.5950.

Recession fears have also sent commodities lower, with oil down 3-4%, taking Brent crude down to USD111 per barrel after falling as low as USD107, while copper is down 2½%.

US equities have been the odd one out, with a recovery during US trading after a steady fall in S&P futures during Asian trading. The S&P500 currently shows a modest gain in early afternoon trading.

Fed Chair Powell faced a Senate panel of lawmakers, where he reiterated the FOMC’s view of strong intent to bring inflation down to 2% and he was fairly upfront about the risks facing the economy. He commented that “we are not trying to provoke and do not think we will need to provoke a recession” but admitted a recession was “certainly a possibility”. Another risk noted was the possibility of inflation becoming entrenched in the economy. Over coming months the Fed will be looking for compelling evidence that inflation is moving down. Overall, there was not a lot new in the testimony.

UK CPI inflation data were close to expectations, with the headline rate up 9.1% y/y in May and the core rate up 5.9% y/y. The headline rate is expected to peak over 11% when the next big increase in household energy bills comes through in October. Against a backdrop of falling global rates, near-term rate hikes were pared back somewhat, but a 50bps hike at the next meeting in August remains fully priced.

Canada’s CPI data were much stronger than expected, rising to fresh multi-decade highs, with the headline rate at 7.7% y/y in May and the average of the core measures up to 4.7% y/y. The data increase the chance of a super-sized 75bps hike at the next meeting in July, although Canada’s 2-year rate fell 6bps against the backdrop of bigger falls elsewhere.

Euro area consumer confidence fell further to minus 23.6% to a level just shy of the nadir at the height of the COVID19 scare in April 2020.

Domestic rates fell across the curve dragged down by global forces and, in particular, much lower Australian short-end rates in the aftermath of RBA Governor Lowe’s comments earlier in the week. Rate hike expectations were pared back, with the July meeting moving closer to 50bps being much more likely than a 75bps move (“only” 55bps now priced). This fed through into shorter dated swaps, with the 2-year rate closing down 10bps to 4.35%, while 5-10 year swap rates were down in the order of 6-7bps. The 10year NZGB fell 6bps to 4.16%.

Global PMI data for Europe and the US are released tonight and are expected to show some slippage in the June flash estimates and remaining comfortably above the neutral 50 mark in all cases. Fed Chair Powell continues his grilling in face of lawmakers.