Global rates have headed even higher, with a number of central banks raising rates, the BoJ being a rare exception. Rates have hit fresh cycle highs, with the US 10-year rate trading above 3.7%. Japan’s MoF intervened for the first time since 1998 to turnaround a plunging yen after the BoJ’s dovish update and resulting in a 5 big figure move in USD/JPY. The NZD eventually found some support just above 0.58 and has since settled around 0.5840.
Central banks continue to make their presence felt in financial markets. The Fed’s 75bps hike less than 24 hours ago accompanied by a hawkish policy outlook continues to reverberate through markets, seeing fresh cycle highs in the US Treasuries, the 2-year rate trading as high as 4.16% and the 10-year rate 3.71%. As we go to print, the 2-year rate is up 7bps on the day to 4.12% and the 10-year rate is up 17bps to 3.70%, so some clear curve steepening is evident.
Economists have been scrambling to lift their Fed Funds rate projections, many now simply matching those of the Fed. The market prices a peak Fed Funds rate of 4.65% in Q2 next year, in line with the Fed’s updated view. It seems that the view of economists, the Fed and the market are now in alignment, the key difference being that the market sees the Fed needing to reverse course through the second half of next year, while the Fed’s view is that policy will need to remain at that restrictive level for some time.
We recently have been highlighting the tail-risk of a BoJ capitulation, but it was business as usual for this central bank. The BoJ maintained its ultra-easy policy stance, and there was no hint that it was about to change course, a stark contrast to other G10 central banks. The BoJ noted “there remain extremely high uncertainties for Japan’s economy” and repeated it “will not hesitate to take additional easing measures if necessary”, giving the impression that remarkably it still had an easing bias. At the press conference, Governor Kuroda was overtly dovish and noted that there no plans to change policy for the time being and “even for as long as two or three years” in principle.
Kuroda’s comments sent the yen tumbling further, sending USD/JPY well up through 145, and as high as 145.89, which triggered the first official intervention in the yen since 1998. Japan’s top currency official Kanda said the government was seeing speculative moves and it was important for the exchange rate to be stable and “we took decisive action just now”. USD/JPY fell to as low as 140.36 and has since stabilised around 142.50. NZD/JPY has traded a 2½ big figure range from just over 82.5 to just over 85, and currently sits just over 83.
The consensus view is that the BoJ’s ultra-easy policy stance is the main cause of particular yen weakness (alongside the USD strength which is affecting most other currencies) and FX intervention can only have a short-term effect. In the absence of any change to the BoJ’s policy, the MoF will have to be actively intervening over coming months to prevent USD/JPY heading back over 145.
The BoE hiked its policy rate by 50bps to 2.25%, as expected by most analysts, although the market was pricing in a good chance of a larger 75bps move. It was a split vote on MPC, with 5 voting for 50bps, 3 for 75bps and 1 for 25bps. While a full set of forecasts wasn’t produced, the Bank noted that the government’s new energy price guarantee meant that the peak in the CPI will now be just under 11%, down from the 13% rate projected in August. There was only a small tweak to the Bank’s forward policy guidance, with the committee leaving in the comment that it “will respond forcefully, as necessary”, should the outlook suggest more persistent inflationary pressures, including from stronger demand. On QT, the Bank confirmed that it would actively sell UK bonds over the next 12 months (about £10b per quarter) and this process will begin shortly.
UK bonds have sold off by more than other markets, with its 2-year rate up 11bps and the 10-year rate up 18bps. This reflects the market’s view that the BoE has plenty of more work left to do to tame inflation, with a peak policy rate priced at just under 5%, against a backdrop of a large (unquantified) fiscal easing as it deals with the energy crisis and BoE gilt sales on top of that. GBP weakened after the policy announcement and it sits at 1.1255, although its overnight move has been in line with the EUR.
Other central bank policy actions overnight include a 75bps hike by the Swiss National Bank, taking the policy rate to 0.5%, so now out of negative territory, and a 50bps hike from Norway’s Norges Bank to 2.25%.
The backdrop of rising global rates continues to increase the likelihood of a pending global recession and equity markets continue to trade cautiously. The S&P is currently down 0.8%, taking its loss over the past month or so to over 12%, and the Euro Stoxx 600 index fell 1.8%.
In currency markets, ahead of Japan’s intervention, new milestones were reached, with the USD trading at a fresh 20-year high (DXY up to about 111.80), the EUR down to just over 0.98, the NZD down to just over 0.58 and the AUD down to 0.6575, to name a few. After a bit of volatility the market has settled, with the NZD trading around 0.5840 and the AUD at 0.6640.
The domestic rates market felt the full force of the move in US Treasuries ahead of the NZ open and the curves flattened, with the 2-year swap closing the day up 8bps to 4.53% and the 10-year rate down 1bp to 4.21%. NZGBs saw good demand at the weekly tender, and the 10-year rate closed the day down 2bps to 4.02%. The large selloff of global bond markets overnight will see significant upside pressure to rates on the NZ open. In NZ data, consumer confidence recovered over the past quarter, but remained at a deeply depressed level consistent with economic recession. NZ’s annual trade deficit widened to a fresh record high of $12.2b, over $9b higher than a year ago, a poor result considering the record terms of trade.
On the economic calendar, global PMI data are released tonight, with the consensus seeing the manufacturing and services indices mostly lower in September compared to the previous month. A notable exception is the US services PMI, which is expected to lift after falling steeply recently, against the grain of the more widely followed ISM services index. The UK releases a mini-Budget, with expectations of tax cuts and sweeping deregulation.
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3 Comments
"..the key difference being that the market sees the Fed needing to reverse course through the second half of next year, while the Fed’s view is that policy will need to remain at that restrictive level for some time."
Asset fund economist vs central bank economist. When asked, Mr Powell said "as long as it takes".
After a decade of low interest, many can't imagine a few years of high interest.
Fed interest rate increases are driving the US$ up & up & up. Not much local support for the Kiwi $ when govt prints money & gives it the poor, which is the bottom half of the population these days. Most of these people just spend, they don't actually create anything other than another generation of welfare dependant people. Usually this doesn't end well.
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