Markets settle, helped by yet another BoE emergency intervention, this time supporting the inflation-indexed bond market. US 10-year rate down to 3.88% after breaking 4% yesterday; NZ rates up to fresh cycle highs

Markets are calmer after the rocky start to the week, with a modest recovery in US equities and the USD under pressure.  The NZD has outperformed, gaining a cent from the fresh low recorded just after the NZ close yesterday to 0.5635. The BoE has made yet another market intervention on financial stability grounds, this time providing some support to the inflation-indexed gilt market, and this has helped settle nerves in the bond market.

After a poor start to the week for risk appetite, some order has been restored to markets, with a new market intervention by the BoE helping to settle the bond market. The BoE extended this week’s emergency gilt buying programme to include inflation linked gilts due to “dysfunction in this market”, offering to buy up to £5b a day, out of the upscaled £10b daily operation announced the previous day for gilts. On the day, the BoE ended up buying just £1.95b of inflation-indexed gilts and £1.35b of gilts. The 10-year gilt fell 3bps, although longer dated gilts were all higher. The 50-year inflation linked gilt fell 10bps after surging 56bps in the previous session.

Many are wondering what happens next week, when the BoE emergency backstop is scheduled to end this Friday. As Milton Friedman once said, nothing is so permanent as a temporary government programme. It also seems unbelievable that under current market conditions the BoE would initiate its QT programme, or active bond sales to the market, from the already-delayed date of 31 October.

The UK unemployment rate fell to 3.5%, the lowest level since 1974, with the labour market showing surprisingly robust jobs growth in the face of pending economic recession, and ongoing strength in wage inflation, certainly nothing to put the BoE’s mind at ease on the inflation outlook.

During the Asian trading session, the US 10-year rate hit the 4% mark, but the hand of the BoE helped drive lower global rates and the rate has fallen back down to 3.88%. There has been the usual daily dose of hawkish Fed speak, but nothing new out of Mester or Brainard that we haven’t heard before. In line with the move seen in the UK 10-year gilt, French and German 10-year yields are down 3-4bps.

In other economic news, as forewarned last week, the IMF cut its global growth projections for next year from 2.9% to 2.7%, after 3.2% growth this year, while inflation was revised up to 8.8% this year, falling to 6.5% next year. Risks to the outlook were said to remain “unusually large and to the downside”, with a 25% chance of year-ahead global growth falling to 2.0%, which would be in the 10th percentile of global growth outturns since 1970.

The latest NY Fed survey of consumer inflation expectations showed the year-ahead rate fall over 30bps to 5.44% while the 3-years ahead rate rose 15bps to 2.91%. The US NFIB small business optimism index rose for a third consecutive month, off a low base. In some rare positive news for China, credit figures were stronger than expected in September, as the government pushed local governments to boost infrastructure spending and allocated more funding to state banks for projects. There were also signs of increased mortgages and loans to companies.

In currency markets, the more positive backdrop on risk sentiment has driven broad-based USD weakness, with the DXY index down 0.5% for the day. The NZD has been the best performing of the majors, recovering strongly from the fresh cycle low of 0.5536 set just after the NZ close yesterday. The currency strengthened more than 2% from that level to just over 0.5655, and currently 0.5635 as we go to print. The AUD shows the same profile, falling to a fresh low just below 0.6250 and currently 0.6320. The outperformance of the NZD sees NZD/AUD back up through 0.89.

The BoE’s intervention has helped GBP slightly more than EUR while JPY continues to languish. An FT interview with Japan’s PM Kishida revealed that he fully supports the BoJ’s ultra-easy policy stance, repeating the mantra of Governor Kuroda that policy needs to remain easy until wages rise. USD/JPY has hovered around the 145.70 mark over the past 24 hours.

Higher global rates pushed up NZ rates to fresh multi-year highs yesterday, with NZGB yields 11bps higher across the curve and the 10-year rate closing at 4.50%. The 2-year swap rate rose 7bps to 4.87%, while longer term swaps rates were up 10-11bps. Electronic card spending data were strong, at 2.5% m/m in September, supported by the hospitality sector as tourism returned to NZ.

In the day ahead, REINZ data should continue to paint a very bleak picture of the NZ housing market. Monthly UK GDP, euro area industrial production and US PPI data are released tonight. Speeches from BoE Governor Bailey this morning, ECB President Lagarde tonight and FOMC minutes of the September meeting round out the calendar.