Canada hikes +50 bps and signals near end of tightening cycle. European data better than expected, supporting EUR. US dollar broadly weaker

Most of the action was in interest rate markets overnight, with less movement in equites and across currencies although the US dollar was broadly on the weaker side.

Signs of slower US wage inflation drove a sizeable rally in US bonds with yields falling across the curve. US Q3 unit labour costs rose 2.4%, significantly lower than the 3.1% increase expected. It was a material slowing from the 6.7% gain recorded in Q2.

US 10-year yields had drifted up through 3.55% prior to the data, before pushing firmly below the 3.50% level post release, to currently sit around 3.44%. Meanwhile, oil prices continue to push lower adding to the less inflationary vibe.

In other rates news, the Bank of Canada hiked 50 bps taking its overnight rate to 4.25%. This was the sixth straight hike and the second 50-point hike in a row following larger 75 and 100-point increments earlier in the year. Importantly, the bank signalled it is at or near the end of its sharp hiking cycle. The bank ‘will be considering whether the policy interest rate needs to rise further to bring supply and demand back into balance and return inflation to target’. Future policy decisions would be guided by incoming data. The bank said upward price pressure may be losing momentum even though inflation ‘is still too high and short-term inflation expectations remain elevated’.

With analysts and the market split between a 25 and 50-point hike at this meeting, there was always going to be some element of surprise. Canadian bond yields were under downward pressure from the above US labour market news ahead of the BoC decision, but bolted around 10 bps higher post announcement bucking the global trend of lower rates on the day. The influence on CAD was more fleeting, with initial kneejerk moves reversed not long after the announcement.

In other news, German industrial production fell in October, but by less than expected with upward revisions to prior data supporting the less negative look. Final Q3 estimates for EU GDP and employment both came out a touch better than initial estimates. It all offered support to the EUR, with the single currency adding about a cent in rising from around 1.045 to take a look at 1.055 before settling back to around the 1.052 mark currently.

Russian President Putin did risk appetite no favours noting the country will defend itself and its allies with ‘all means necessary’. Although this did not alter risk sentiment in a big way, it was enough to see EUR pare its earlier gains and added to the general bid tone in bonds.

The US dollar is generally lower, with the DXY dollar index down around 0.4%. Lower US rates not helping the greenback, particularly against the yen, with USD/JPY off around 0.5% on the day and opening around 136.40 today.

Yesterday, China announced further relaxation of Covid control measures such as allowing some home quarantine (for low-risk people) and reducing unnecessary testing, offering some support to risk appetite. This initially supported risk appetite but was subsequently overshadowed by weak China trade data. The figures highlighted China’s current economic challenges, with both exports and imports coming in materially lower than a year ago and softer than expectations. China’s weaker exports speaks to softer global demand while increasing Covid cases pose issues for domestic production and demand. That put paid to any thoughts of material improvement across commodity currencies on the day.

But a softer US dollar overnight, sees the likes of NZD and AUD perkier this morning both up around 0.7% in the session. NZD has pushed back up to around 0.6370, about half a cent higher than where we left it yesterday afternoon, with gains kicking off post the US labour market data. This puts the NZD more comfortably above its 200-day moving average, which currently comes in around 0.6280, but would have to kick on a bit more to avoid 
breaking its seven-week winning streak.

Australian Q3 GDP came in a touch under expectations yesterday, with downward revisions to prior data adding to a sense of mild undershoot. Nothing to disturb the AUD, but enough to see AU swap rates ease 2-3 bps across the curve post release. AU bond futures have rallied 3-4 bps overnight which, along with the moves in US treasury yields, will likely set the early tone in NZ rates markets today.

Locally yesterday, the swap curve flattening continued, with the likes of 2-year yields up about 3 bps while 5-year yields slid a point and 10-year yields dipped 3bps. The 2y10y swaps curve pushed on to another post-GFC low around -90 bps. NZ 2-year swap rates closed at 5.11% yesterday, to sit near the middle of the approximate 4.90% to 5.30% range over the past month or so. In contrast to swaps, NZGB yields were more broadly higher and steeper at the long end of the curve yesterday reversing some of the greater flattening compared to swap that occurred in late November. NZGB33’s closed up 5.5 bps at just over 4.6%.

In other news yesterday, the latest NZ ETS carbon auction saw NZU’s clear at a price of $79. That was some 3.7% under the previous day’s secondary market closing price.

There doesn’t look to be much on the calendar to excite markets over the coming 24 hours. US jobless claims will be of some interest with continuing claims already on the threshold of signalling economic recession, while the ECB’s Lagarde is on the speaking circuit ahead of next week’s policy decision. In Australia, October trade data is due.

Locally, dairy giant Fonterra is scheduled to give a quarterly business update with scope to update its milk price forecast for the current season. If that were to move from its current mid-point of $9.25/kgMS, we think it would be a nudge lower. Milk price futures for the season have been recently trading around the $8.90 mark.