It has been a rollercoaster ride for markets over the past 24 hours, with signs of improved risk appetite yesterday, reversing course overnight, not helped by solid US economic data (good news is bad news), more hawkish Fed-speak, and ongoing focus on the UK’s vulnerabilities. The US 10-year rate has increased to a fresh cycle high, knocking on the door of 4%. The USD shows broad-based strength again, with the NZD giving up all its gain seen yesterday.
The UK remains at the centre of financial market turmoil. The FT reported that UK Chancellor Kwarteng was out “selling” his fiscal package, meeting with heads of financial companies in the City of London, trying to reassure them that he was confident his economic strategy would work. He said he was working closely with the BoE, meeting with Governor Bailey on a daily basis to try to stabilise markets. Kwarteng said that he remained committed to bringing debt under control.
The BoE’s Chief Economist Pill said that based on Chancellor Kwarteng’s fiscal update “it’s hard not to draw the conclusion that all this will require a significant monetary policy response”. He pushed back on the idea of an emergency rate hike and said that the BoE’s planned bond sales (QT of £10b per quarter) should go ahead as planned next week if the market pricing stays orderly, “as has been the case in recent days”. Really? Not surprisingly, in response UK rates have continued to surge across the curve, with pricing for the policy rate now up through 6.25% by mid next-year, the 2-year rate up 17bps (taking the gain over the past week to 132bps) and the 10-year rate up 26bps to 4.50% (now up 121bps over the past week).
On top of the UK energy crisis, fiscal crisis and balance of payments crisis, we can add a credit crunch, with a number of banks pulling mortgage deals in the face of escalating rates, making changes to their mortgage product range and temporarily stopping making home loans to new customers.
Higher UK rates continue to spill over into other markets but US economic data released were mostly stronger than expected, adding to the upside pressure in US rates, although the yield curve has steepened and the 2-year rate is actually down 2bps on the day, against a push higher in longer term rates. The 10-year rate is up 5bps to 3.97%, after hitting a fresh 12-year high of 3.99%.
The Conference Board measure of consumer confidence rose more than expected to a five-month high of 108.0, with gains across the expectations and present situation indices. Falling gasoline prices and a strong labour market were said to be behind the lift in confidence. New home sales unexpectedly surged 29% in August, breaking a significant downturn, although this might just reflect a race by buyers to beat further increases in mortgage rates and take advantage by price cuts from builders. Finally, durable goods orders data were solid, with core capital goods orders up 1.3% m/m in August.
Fed speakers are out in force this week and St Louis Fed President Bullard remained as hawkish as ever, saying that inflation was a “serious problem” and the credibility of the inflation-targeting regime was at risk. He noted the dotplot that showed the Fed Funds rate heading to a range of 4.5-4.75% next year and said that “I think we need to stay at that higher rate for some time”. Chicago Fed President Evans’ spoke to CNBC and his comments were in line with the official Fed view we heard last week.
In other news, gas flow between Russia and the rest of Europe has been curtailed further, with flows through the Nordstream pipelines knocked out by what European officials said looked like sabotage and Gasprom warned that another pipeline that runs through Ukraine was at risk. European gas prices rose 7% to €186 although they remain well down from levels seen earlier this month (closer to €250) and the spike in August (over €300).
Currency markets have staged a 180-degree turnaround, with the USD recovering overnight after reversing course through the Asian trading session. The NZD gained almost a cent, reaching just above 0.5720 early evening, but has since slumped, revisiting Monday’s low of 0.5625. The AUD’s overnight downturn has been slightly larger and it has traded at a fresh 2½ year low just below 0.6415. NZD/AUD is modestly higher at 0.8765.
USD/JPY is approaching the key 145 mark again, with any further gain raising the chance of further intervention by Japan’s MoF. GBP has traded a wide range, falling from a high of 1.0838 to a low of 1.0653 and currently near the bottom end. EUR is trading back below 0.96.
In equity markets, after a strong open, the US S&P500 index is down over ½%, trading at fresh lows not seen since late 2020.
The domestic rates market saw significant upside pressure, playing catch-up after the Monday holiday to some of the brutal moves seen offshore. But moves could have been a lot worse and swap and NZGB rates out to 10 years maturity rose by “only” 12-14bps on the day. The 2-year swap rate closed at its highest level since 2009 at 4.74%, incorporating a peak OCR rate close to that level. The 10-year swap rate closed at 4.51%, still below the mid-June peak and the closing 10-year NZGB rate of 4.29% was in line with the mid-June peak. Overnight, the Australian 10-year bond future is up about 5bps in yield terms and that will set the tone for trading on the NZ open.
In the day ahead, the second-tier economic releases on the calendar shouldn’t perturb the market with bigger things to worry about. A number of central bankers will be giving speeches over the coming 24 hours, including at least four from the Fed and three from the ECB, no doubt highlighting the need to beat inflation with higher rates.
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12 Comments
The drop in NZD shows an increasing lack of confidence in the NZ economy and a flight to safety of USD with its higher OCR of 3.25%
NZ’s current account deficit (Exports - Imports) of $27 billion for year ending 30 Jun 22 or $5k per person shows that NZ is living beyond its means. This deficit has to be funded from overseas cash inflows but why buy NZD when USD is paying more interest?
The Reserve Bank’s credibility for its forecast of 13 consecutive quarters of GDP growth between 0.0% & 0.6% is way too optimistic given the current NZD trajectory.
A hard landing for the NZ economy is now greater than 50% & stagflation (no GDP growth, high inflation) is the probable outcome over the next 12 months.
disappointing that the leftspeak 1 news last night tried to make out that it was ALL the US dollar and that the british pound was getting hammered -- as if it was nothing to do with NZ policies and actions
Would have been nice to see them present a more balanced view -- showing that the Kiwi$ has dropped against virtually all the major currencies including teh Aussie -- and that the reality is the Kiwi and Pound are faring worse because of basket case actions of their Government and Central Bankers
Does anyone know if there is a kiwi $ stop point ahead where significant market supports will be triggered to hold its value ? if not there is little to stop it heading below 50cents at which point we are talking years before inflation retreats and all bets on interest and mortgage rates are off.
You are absolutely on point. The gall that they had to hit on the GBP when the NZD is faring badly, without any government intervention nor any war to support.
It's as if the house is burning and yet RBNZ is saying that the forest elsewhere is burning too so nothing too much to see here. Really!??!??
Just short the NZD at this stage. It's a freely-traded currency and I wouldn't be surprised if currency speculators and hedge funds are already taking short positions. What can Orr do anyway? Raise the OCR by at least 100 points to stem the bloodshed? He doesn't have the courage.
The NZD will be centre stage for the next month or so with inflation and trade deficits having strong support roles. Meanwhile in the wings NZ property will be going through the grinder as OCR hikes come with markets pricing in more rises than expected and for longer.
It's time for Mr Orr to earn his salary. He needs to exceed markets expectations next week with 75bps being almost tokenism and 100bps being a bullseye. Time to step up......
Central banks around the world raising rates, anyone with a mortgage will paying more for years so eventually average citizens will be paying for there mistakes. But if they raise rates to much defaults and insolvency will hit even slightly over leveraged people. House prices will also tumble as we are already seeing in New Zealand. I just hope inflation will be contain but I get the feeling the FED would like to have inflation for a while so to lower debt value on their books.
US 10 Year Treasuries hit 4% and the NZD hits another recent low under 0.5600 - note the 15 March 2020 low was 0.5470 and prior to that you have to go back to the GFC (Mar 2009) where the NZD hit the 0.49c area as impacts flowed through. These currency moves are going to be a point of discussion in many Boardrooms given the implications for the business with respect to costs and incomes. It is not just about USD moves and interest rates there will be some concerned on NZ's positioning to weather the coming storm. There are a lot of leaks in this boat and without the right navigator the rocks look pretty threatening
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