Global rates continue to push higher. European gas prices continue to surge. Higher inflation backdrop sees market pricing in more aggressive rate hikes from ECB, BoE

It has been another quiet night with little newsflow but that hasn’t prevented global rates continuing to rise, not helped by surging gas prices and nerves ahead of Fed Chair Powell’s speech at the end of the week. Higher inflation expectations are seeing the market price in more aggressive rate hike expectations and this is feeding into higher rates right across the curves for Europe and the US. Currency moves have been modest but a slightly stronger USD sees the NZD back below 0.62.

Summer trading conditions have continued and newsflow has been light.  In economic data, US durables goods orders were flat in July, weighed down by lower orders for defence aircraft and parts while core orders showed modest gains, but likely less than the rate of inflation.  Pending home sales fell by slightly less than expected at 1.0% m/m in July but continue to trend lower and are down 27% from their October peak.

Soft incoming data have been weighing on the Atlanta Fed GDPNow estimate for Q3, the latest figure down to 1.4%, from 1.6% a week ago and 2.5% two weeks ago. It’s still early days with major releases yet to come, but early signs are for a tepid rebound in US GDP after two consecutive negative quarters.

Global rates continue to push higher, driven by the inflation backdrop. European gas prices rose another 8½%, taking the Dutch TTF benchmark to a fresh record close of EUR292/Mwh, up 53% for the month to date. UK gas prices show similar moves. The dire European gas situation has been spilling over into other markets, with US gas prices continuing to trade near record highs. Bloomberg is running a story on how 1 in 6 US households have fallen behind on their utility bills, the worst ever recorded as household gas and electricity prices surge.

Markets are betting that the higher inflation backdrop will lead central banks to raise rates more aggressively, ignoring the rising likelihood of economic recession. The UK 2-year rate is up a hefty 22bps on the day to 2.90%, taking its gain for the month to 122bps as the market ramps up expectations of tighter policy from the BoE. The market is pricing hikes of at least 50bps, with some chance of 75bps moves, over the last three meetings of the year and a peak policy rate in the order of 4.25-4.5%, well above that expected in the US. Germany’s 2-year rate is up “only” 8bps in the day and “only” 64bps for the month, with 125bps of ECB hikes priced over its last three meetings of the year and a peak policy rate close to 2% next year.

US rates are also heading higher, not helped by what’s going on in Europe, and anticipation of a hawkish speech by Fed Chair Powell at Jackson Hole at the end of the week. Treasury yields are up 5-8bps across the curve, from 2 years right through to 30-years. At 3.38%, the 2-year rate is now within spitting distance of the mid-June high, while the 10-year rate at 3.10% still has some way to go to reach the mid-June peak of 3.5%.

The higher rates backdrop hasn’t done any harm to US equities overnight, with the S&P500 showing a modest gain.

To the extent that higher European yields are being driven by higher inflation expectations, they are not providing any support for the EUR or GBP.  Currency moves have been fairly modest over the past 24 hours but with a hint of USD support.  EUR continues to languish below parity at 0.9960, while GBP has fallen back below 1.18. JPY continues to struggle against a higher global rates backdrop, and USD/JPY is back up through 137.

The NZD has lost all the gain seen post the weak US PMI services data the previous night and trades back down around 0.6180. The AUD is back down to around 0.69. Underneath the radar, NZD/AUD has been edging down towards the bottom of its range of the past few months, trading close to 0.8950.

It was a rollercoaster ride in the domestic rates market yesterday, with upside pressure from the open, then downside pressure in the afternoon, continuing to be knocked around by global forces. Swap rates closed the day down slightly across most of the curve.  NZGBs underperformed, with the 10-year rate up 3bps to 3.83%. With the Australian 10-year bond future up 5bps in yield terms since the NZ close, the bias on the open will be for higher NZ rates.

NZ retail sales data due today for Q2 are dated, but will help inform the extent of the temporary post-lockdown bounce-back in activity. Germany’s IFO survey is expected to be another weak one, while the second estimate of Q2 US GDP growth is expected to be revised a touch higher but remain negative.