It has been quite an eventful night, with a strong upside surprise to US CPI inflation and a surprise 100bps hike by the Bank of Canada. Despite some intraday volatility, most net market moves don’t look out of the ordinary, with flat US equities and modest changes in currencies. The USD and JPY are broadly weaker. The EUR very briefly traded below parity before recovering. The NZD hit a fresh 2-year low of 0.6081 before recovering to 0.6140. More interestingly, the US yield curve has flattened considerably further, with the 2s10s gap down to minus 23bps.
There was much anticipation in the lead-up to this week’s key event, the US CPI release, and it certainly lived up to the billing. US CPI surged higher in June, with a hefty 1.3% m/m increase taking the annual increase to a fresh four-decade high of 9.1%. And it wasn’t just caused by surging gasoline and food prices, with the core measure increasing 0.7% m/m and 5.9% y/y. Inflation showed no sign of retreating, with goods inflation remaining strong and services inflation picking up across the board, a clear sign of an over-heated domestic economy. Alternative core inflation measures showed signs of inflation over the month picking up, with the Cleveland Fed median and trimmed mean measures and the Atlanta Fed’s sticky CPI measure all showing higher monthly increases than previously seen.
The strong inflation data put more heat on the Fed to do something about it. It’s too late for monetary policy to have much impact on inflation over the short term, but it will need to rein in inflation expectations and optics are everything. With the top of the Fed Funds range still only 1.75%, the market moved to price in a better than even chance of a 100bps hike later this month, followed by another super-sized move, closer to 75bps in September. Atllanta Fed President Bostic spoke after the release and said that the June CPI was concerning and “everything is in play” with regards to the July meeting.
Market pricing for a 100bps move heightened after the Bank of Canada shocked the market by hiking by 100bps itself, a larger move than the 75bps widely anticipated. The statement noted “With the economy clearly in excess demand, inflation high and broadening, and more businesses and consumers expecting high inflation to persist for longer, the Governing Council decided to front-load the path to higher interest rates”. Governor Macklem said that by front-loading rate hikes the Bank was trying to avoid the need for even higher interest rates down the road.
Earlier in the session, UK activity data were much stronger than expected, with GDP up 0.5% m/m, with the surprising strength led by the manufacturing and construction sectors. The data suggest that the economic recession might not have begun yet and add to the chance that the BoE will deliver a 50bps hike next month, following a string of 25bps hikes. The overnight events make the ECB’s meeting next week a more interesting one, with President Lagarde previously guiding to a 25bps hike but a larger 50bps move seems the greater risk. Market pricing moved a little higher, but still with only 31bps worth of hikes priced.
Markets were volatile across the key US CPI and Bank of Canada releases. US Treasury rates initially ramped higher across the board, but a more aggressive front-loading of hikes eventually saw longer term rates ease back. Currently, the 2-year rate sits at 3.14%, up 9bps on the day and the 10-year rate is at 2.91% down 6bps, a notable curve flattening that sees the 2s10s gap at minus 23bps, providing a stronger signal of economic recession ahead.
The S&P500 fell by over 1.5% on the open before recovering and the index currently shows a small gain, alongside the Nasdaq index.
The USD initially shot higher before reversing course, the dollar now showing losses for the day against all key majors apart from the yen. The BoJ looks like even more of an outlier in this crazy world with its ultra-easy policy stance and even though the US 10-year rate is lower, USD/JPY has pushed higher to 137.30.
The surprise BoC hike had a fairly muted impact on CAD, with USD/CAD only down 0.4% for the day to 1.2965. EUR dipped just below parity to 0.9998 in the aftermath of the US CPI release, but has since recovered to 1.0065. The NZD traded at a fresh 2-year low of 0.6081 but has since recovered to 0.6140. There have ben no notable moves on NZD crosses; NZD/JPY is the biggest mover on the day, up 0.5% to 84.3.
Yesterday, the RBNZ offered up a “no surprises” Monetary Policy Review, delivering another 50bps hike in the OCR to 2.5% and indicating comfort with its OCR projections in the May Statement which showed an OCR heading to about 4%, well above neutral, before easing back. Earlier in the day, REINZ data showed the damage tighter policy was doing to the housing market, with house sales slumping 38.1% y/y in June and the house price index now down 9.5% from the November peak.
The NZD barely moved after the RBNZ’s announcement while wholesale rates fell, as there had been a small chance of a super-sized 75bps hike priced in and the market’s track over the short term has been more aggressive compared to the RBNZ’s projections. The passing of another risk event might have also been a factor. Trading conditions were choppy afterwards, with a chunky fall in rates later pared back. On the day, the 2-year swap rate closed 4bps lower to 3.88% while the 10-year rate fell 5bps to 3.80%, with similar moves seen for NZGBs.
In the day ahead, Australian employment is expected to show a robust 30k increase in June that would send the unemployment rate down to 3.8%, reinforcing the need for the RBA to get on with the job of tightening policy. US PPI inflation will continue to show plenty of inflation in the pipeline.
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3 Comments
For a moment, BOC = Bank of China. It was Bank of Canada.
Talking about China, is there a bank run, or fear of one. I sympathise with the chinese bank account holders who can't withdraw their money. Nope tourists aren't coming to NZ in numbers.
Just several weeks ago, it was 50-50-50 hikes, now 100. Is US inflation out of control, into unknown or wild frontiers.
"Earlier in the day, REINZ data showed the damage tighter policy was doing to the housing market, with house sales slumping 38.1% y/y in June and the house price index now down 9.5% from the November peak."
With stocks in decline, will money be allocated to housing.
With the NZ$ in decline, is it likely that less buying from overseas.
Maybe it should be BanCan for Bank of Canada?
Recession locked in. Good. Now we can get rid of all the shitty things that we don't really need, including some big corporate stuff as well. Recessions are great opportunities, even if they are hard on labour. They clear away the cowboys (& cowgirls) & (in theory) we end up with the better stuff surviving, which is better in the long term for the nation. Strong businesses make strong nations, not that you'll see that anywhere these days.
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