There has been plenty of data to digest but the largest move in markets came following a sourced Bloomberg report suggesting a less hawkish ECB in the months ahead. This saw lower global rates, led by the short end, and a weaker euro. A weak US Empire manufacturing report added to the downside pressure on US rates after an earlier move higher in US Treasury yields. The NZD has performed well despite yesterday’s poor QSBO report and growing expectations that the RBNZ need not deliver another 75bps hike.
Bloomberg reported that “ECB policymakers are starting to consider a slower pace of interest rate hikes than President Lagarde indicated in December”, with sourced comments that “while the 50bps step in February she signalled remains likely, the prospect of a smaller 25bps increase at the following meeting in March is gaining support”.
Euro area rates plunged on the headline, driven by the short-end, with Germany’s 2-year rate currently down 12bps and the 10-year rate down 9bps – the news encouraging the theme already embraced by investors this year of lower expected inflation, providing less scope for further global policy tightening this year. The news added to earlier falls in US rates, with the 2-year rate down 2bps and the 10-year rate up 3bps to 3.53% for the day, after earlier trading as high as 3.58%.
The earlier fall in US rates was supported by the first of the regional manufacturing activity indicators, the NY Empire index, unexpectedly plunging to minus 32.9, near GFC-nadir levels and further confirmation that the manufacturing sector is heading towards, or already in, recession. The divergence between positive Euro area economic surprises and negative US surprises continued, with Germany’s ZEW measure of investor expectations unexpectedly showing further recovery, now close to its 10-year average at +16.9 compared to a nadir of minus 61.9 only four months ago.
Canadian CPI data supported the theme of slower global inflationary pressure, with the headline and core measures falling to 6.3% and 5.6% respectively. The Bank of Canada is nearing an end to its tightening cycle, with a possible 25bps hike next week in its policy rate to 4.5%, but some in the market suggesting that another hike is not necessary.
UK labour market data showed signs of a slower pace of hiring but still tight conditions, with the unemployment rate steady at 3.7% and signs of still-strong wage growth of 6.4% y/y for average earnings excluding bonuses, a 20-year high, excluding the height of the pandemic. The data supported higher UK rates, including the market pricing in an increased chance of the BoE hiking another 50bps early next month, before global forces sent UK gilt yields lower.
China activity indicators were weak, dragged down by the impact of spreading COVID infections, but not nearly as weak as expected, if you believe the official figures. There was little market reaction, with the focus on the reopening of the economy and the potential for a strong economic bounce-back over the coming year, notwithstanding ongoing economic disruption over the very near-term. A report showing that China’s population shrunk in 2022 for the first time since 1961 got more attention – putting focus on the country’s rapidly aging population, a lower pool of workers and likely weaker productivity growth for years to come.
In currency markets, the euro has been the weakest performer overnight on the ECB news, down to 1.0780 after being around 1.0860 ahead of that Bloomberg report. GBP has been the strongest of the majors, supported by the strong labour market report and is up 0.5% overnight to 1.2250. The yen is 0.4% stronger overnight, ahead of the BoJ meeting later today (see below), with USD/JPY down to 128.30.
The poor NZ QSBO report yesterday (see below) had no impact on the NZD and the currency has been one of the better performers since, making up some lost ground on the crosses so far this year. It currently trades at 0.6420. We see near-term resistance around 0.6465, a level it hasn’t closed higher than since its strong recovery over recent months. NZD/AUD pushed back above 0.92 overnight and currently sits around that mark.
The latest GDT dairy auction looked uneventful, with little change in the overall price index and little change in whole and skim milk pricing, a 4% lift in cheddar being the only notable mover. The flat price index follows a 3.8% fall in the late-December auction and a 2.8% fall in the early-January auction.
The final two of the six big US banks reported overnight, with a weaker than expected result from Goldman Sachs sending its share price 7% down and an earnings beat from Morgan Stanley sending its share price up 6%. The S&P500 is currently down slightly while the Euro Stoxx 600 continued its strong run so far this year, adding another 0.4%.
The NZIER’s QSBO painted a clear picture of stagflation, with business confidence and other activity indicators falling to near-50-year lows while measures of capacity pressures remained very tight with heightened inflationary pressure. The question for the RBNZ is whether to put more emphasis on recent business and consumer surveys which are consistent with a GFC-style deep recession, or maintain a focus on lagging inflation indicators.
The market has been gradually putting more weight on the former than the latter, with OIS pricing for the February meeting closing at 4.87%, the first time since early December of the implied probability of a 50bps hike being greater than the probability of 75bps. The 2-year swap rate fell to as low as 4.94% before closing the day down 4bps at 4.98%. The 10-year swap rate traded down to 4.22% before global forces saw it end the day up 2bps at 4.28%.
In the day ahead, REINZ data are likely to continue to paint a very bleak picture of the housing market, with very weak sales levels and falling house prices. Electronic card transactions data have been volatile of late and we anticipate a soft end to the year for the December reading.
There will be keen interest in the BoJ’s policy meeting later this afternoon, with the Bank struggling to contain the 10-year rate at, or below 0.5%, (and with an actual policy target of 0%). The Bank’s current policy stance is unsustainable against a backdrop of surging inflation and the market anticipating the silly yield curve control policy soon ending. The policy decision, even if remarkably left unchanged, would have ramifications for the yen and global bond market.
Key data releases tonight include UK CPI and in the US retail sales, PPI, industrial production and the NAHB housing market survey.
Daily exchange rates
Select chart tabs
4 Comments
Jason is good value, good piece.
Readers will know I have been more bearish than most on the economy, inflation and interest rates. So not surprised that inflation is dropping and the chat has turned to less interest rate hiking. As I have said before, much of the talk from central banks was jawboning.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.