Global rates show some chunky falls, a sign that global bond markets were oversold late last week, but Fed pivot narrative and weaker US data helping

Weaker US economic data and the afterglow of Friday’s WSJ article on the Fed looking to dial down rate hikes have helped drive down US Treasury yields and this is helping support US equities. The USD has shown further signs of vulnerability against that backdrop and shows broadly based losses. GBP has outperformed as new PM Sunak gains the confidence of the market. The NZD has pushed up to 0.5750.

Markets are still trading in the afterglow of the planted WSJ article by Nick Timiraos, who is seen as a mouthpiece for the FOMC when it seeks to send a message to the market. There is a sense that the market might have passed the state of peak Fed hawkishness, as FOMC members look to discuss dialling down the pace of rate hikes from December, after another 75bps hike baked in for November. The market is looking for reinforcing factors for that view and the economic calendar obliged with a weaker set of US data.

The slump in housing market indicators through much of this year is finally showing it mark on US house price inflation. The S&P CoreLogic Case-Shiller 20-city house price index, which steadily rose through the first half of the year, showed a second consecutive monthly fall in August, down 1.3% m/m, the largest fall since March 2009. Consumer confidence undershot market expectations by about 3½ points to 102.5 for October, mainly driven by the present situation component. The commentary in the release pointed to concerns about inflation but the weaker index also likely reflects a weaker labour market. Indeed, the net balance of jobs plentiful versus jobs hard-to-get fell 5½ points to 32.5, the weakest level in 18 months.

The US 10-year rate was as high as 4.33% before Friday’s WSJ article was published and it has fallen another 15bps today, taking it down to 4.09%, trading as low as 4.05% overnight. The 2-year rate fell by more on Friday in the immediate aftermath of that WSJ article and hasn’t kept pace, falling only 5bps to 4.46%, driving some curve flattening.

European rates have fallen even more than the US, a sign that global factors are also at play and it might just be a case that the global bond market was oversold late last week. French and German 10-year rates are down 16bps on the day. Germany’s IFO business climate index was little changed in October, with the expectations component remaining at levels consistent with economic recession.

Sunak officially became UK’s new PM and he warned of a “profound economic crisis”.  He appointed Cabinet positions which included leaving Hunt as Chancellor of the Exchequer. His policies are likely to show much more fiscal austerity compared to Truss, a more market friendly backdrop, as evident in the market reaction since he won the leadership. GBP has been the best performer overnight, gaining 1½% to 1.1480, falling just shy of 1.15 at its peak, and is up 3½% for the week so far. UK’s 10-year rate fell 11bps to 3.64%, taking its fall this week to 42bps.

Australia’s Budget released last night showed modestly wider projected deficits, from 1.5% of GDP in the current fiscal year, rising to 2% of GDP by FY25, albeit a better set of fiscal metrics compared to the pre-election Budget. The Budget doesn’t add extra inflation pressure in the economy, but also doesn’t alleviate pressure on the RBA, given persistent structural deficits of around 2% of GDP. Australia’s 10-year bond future is down 14bps in yield terms since the NZ close, driven more by global forces.

In currency markets, the USD continues to lose its edge as traders eye a slower pace of Fed tightening.  The USD remains extremely over-valued on long-term metrics and a Fed pivot is a necessary condition for a sustained downturn in the USD. It remains to be seen if we are finally past the peak in the USD, but the makings of it could be starting to piece together. As noted, GBP has outperformed, but all the key majors have also risen against the USD. EUR is up through 0.9950 and the lower rates backdrop has taken the pressure off the yen, with USD/JPY falling below 148.

In yesterday’s trading there was focus on the yuan, after the PBoC set a relatively weak CNY fix (by recent standards) of 7.1668 which the market took as a sign of the government not fighting too hard to prevent further yuan weakness. USD/CNY drove up towards the 2% edge of the allowable trading band, to just under 7.31. USD/CNH broke above 7.37 overnight but a weaker USD has since seen it drop to 7.32. The market has given an initial thumbs down to President Xi tightening his grip on power by promoting his most loyal allies – no trust in meritocracy here – to the key Politburo Standing Committee. There is plenty of news about investors becoming more bearish on China and the FT has an article on China’s wealthy activating escape plans on a pessimistic view of China under a third term of Xi.

The NZD is up to 0.5750 but the AUD has recovered by more, making a temporary break above 0.64 and seeing NZD/AUD back down to close to 0.90. Of note, yesterday there was little sign of spillover of a weaker yuan into the NZD and AUD, a hopeful sign that the strong correlation between the yuan and the Antipodean currencies might be breaking, or that global forces were the bigger influence on the day.

The domestic rates market played catch-up to lower global rates, after Monday’s holiday, with some curve steepening. The 2-year swap rate fell 13bps to 5.19%, against a 6bps fall in the 10-year rate to 4.95%. Some choppy intraday swings remained a feature of the market, making trading conditions difficult. The NZGB curve showed similar moves, with the 10-year rate down 7bps to 4.58%.  The overnight move will see rates gap lower on the open.

RBNZ Chief Economist Conway said at a conference that annual CPI inflation of 7.2% was “obviously too high” but “we expect to see inflationary pressures easing going forward” and “are hopeful that it has peaked”. He added that the “very rapid tightening in monetary policy” is starting to have an effect and “there are early signs that the economy is starting to cool”. These comments were balanced against a view that the Bank had under-estimated global inflationary pressures and the era in which globalisation suppressed inflation may be coming to an end.

In the day ahead, the ANZ NZ business outlook survey might show another small lift in activity indicators, from a depressed level, but there will be more interest in the pricing indicators to see if they provide any hint of easing inflationary pressure. The key focus on the day though will be the Australia’s Q3 CPI release early afternoon, where the market will be alert to any upside surprise, following the same from the US, Canada and NZ in the past week. Tonight, the Bank of Canada is expected to hike its policy rate by 75bps to 4%, becoming the first G10 central bank to reach that threshold, although there is a chance it only opts for a 50bps hike.