Markets are trading with a slightly cautious tone ahead of tonight’s key US CPI release. US equities are flat, US Treasury yields are little changed from the NZ close and the USD has reversed course after hitting a fresh 20-year high. EUR came within a whisker of parity before recovering, while the NZD has also recovered modestly after hitting 0.61 overnight. Oil prices have fallen back below USD100 per barrel.
Most of yesterday was spent watching EUR track lower and wondering when parity with the USD would be hit. Last night, EUR came within a whisker of trading at parity with Bloomberg data suggesting it touched 1.00003 before rebounding, now about 1.0050. There are large option strikes at parity and it looked like traders mounted an all-out offensive to protect the level from hitting.
An eventual break of parity looks inevitable, whether it happens this week or later. The date 21 July should be marked in everyone’s calendars, the day that the Nord Stream 1 gas pipeline is due to be switched on again after a scheduled 10-day maintenance period that began this week. That date also happens to be the day of the next ECB meeting. Either of these events are key risk events. Russia playing gas politics by not switching on the gas supply would likely see the EUR lurch much lower while the ECB is expected to kick off a rate hike cycle with a 25bps hike and its forward guidance will be important.
JPY has also been on the radar after the yen recently hit a fresh 24-year low against the USD, taking its loss this year to over 16%. After meeting her Japanese counterpart, US Treasury Secretary Yellen suggested no appetite for currency intervention to prop up a weak yen saying that G7 countries should have market-determined exchange rates and “only in rare circumstances is intervention warranted and we did not discussion intervention”. A joint statement said that “we will continue to consult closely on exchange markets and cooperate as appropriate on currency issues”.
After hitting a fresh 20-year high of 108.5 last night, the USD DXY index reversed course and now shows a small net loss for the day, making broadly based losses since the NZ close. The turnaround has seen the NZD trade back up to 0.6135 after hitting an overnight low of 0.61. The AUD hit a fresh 2-year low of 0.6711 and has recovered to 0.6770.
Oil prices have fallen in the order of 7%, with Brent crude trading below USD100 per barrel and WTI below USD96, with fears of economic recession and China’s growing COVID19 case numbers noted as possible causes, while other traders pointed to dwindling liquidity conditions as another factor exacerbating price moves. OPEC published its first outlook for 2023 and noted that it expects global oil demand growth to exceed the increase in supplies by 1 million barrels a day. Separately, OPEC production data showed that the cartel’s output continued to run below target in June, at more than 1 million barrels per day, raising concerns about whether it is capable of increasing supply.
Economic data releases have been second-tier but all of them are consistent with weaker levels of activity. The US NFIB small business survey showed overall optimism continuing to trend lower, now down to its weakest level since 2013, while the business activity outlook index fell to a net minus 61%, the lowest level in the survey’s 48-year history. Germany’s ZEW investor expectations index fell to a 10-year low of minus 53.8. Yesterday, Australian data showed both lower consumer sentiment and business confidence.
US equities have been trading relatively flat for the session. The US 10-year rate is little changed from the NZ close, at 2.95%, after trading down to 2.90% overnight. There was more price action in European markets, where Germany’s 10-year rate fell 11bps to 1.13%, its lowest level since the end of May and down 80bps from its mid-June peak. Recession fears are greater in Germany than elsewhere, given the country’s reliance on Russian gas to fuel its industry. A prolonged cut to the gas supply would halt a lot of economic activity, sending the country deep into recession.
The domestic rates market underperformed yesterday, with rates not falling as much as the global tailwind suggested, not helped by paying pressure in short-end swaps, ahead of the RBNZ’s MPR today. The 2-year swap rate closed 2bps higher at 3.93%, while the 10-year rate fell 4bps to 3.85%. NZGB yields from 2-10 year maturities fell 2-4bps.
The calendar ahead is full. The key domestic release is the RBNZ’s Monetary Policy Review which shouldn’t surprise, with all economists surveyed predicting another 50bps hike in the OCR to 2.5% and this is fully priced by the OIS market. We see forward guidance broadly consistent with the May MPS, with the Bank continuing to indicate the need for further rate hikes to meet its inflation objective.
The US CPI is the key global release. Inflation is expected to remain high, with annual CPI up to a fresh multi-decade high of 8.8%. Annual core inflation is expected to slip to 5.7%, but a monthly increase of 0.5% would remain far too high for comfort. Odds favour the Bank of Canada doing a super-sized 75bps hike in its policy rate to 2.25%.
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