Limited news flow overnight. US equities are lower, led by the tech sector, as Mircosoft noted several headwinds for the sector including slowing demand. The S&P500 opened lower and was down as much as 1.4% at one point before regain composure to currently sit down around 0.8% and hovering just above its 200 day moving average. The NASDAQ is down 0.9%.
US 10 year rates saw a similar pattern to equities taking a look under 3.42%, before recovering to currently sit about flat for the day around 3.45%. The US treasury curve is a touch steeper with short end rates a point or two lower. There was little net movement in currencies. The US dollar is marginally lower, with USDJPY down 0.5%, while the NZD marginally extended yesterday’s under performance.
The Bank of Canada hiked 25bps, to 4.50%, meeting expectations and signalled a pause ahead. Call it a dovish hike. The BoC said any pause would be ‘conditional on economic developments’ unfolding as anticipated. The BoC forecasts inflation falling to 3% by mid this year and to 2% in 2024. This is quite a contrast to the RBNZ’s latest forecast for NZ inflation which saw 6-7% inflation mid this year and not getting to 2% until late 2025. The BoC decision saw CAD slip around 0.4% not long after the meeting and Canadian bond yields are around 3-5 bps lower across the curve.
There was limited data out overnight with the German IFO survey the only bit of note. German business expectations continued to push a little higher to less dreadful levels. Its 86.4 was a touch above expectations continuing a theme of less bad economic news coming out of Europe. Plunging EU gas prices has been very much part of that with the slide continuing overnight, to the tune of another 3%. EUR pushed above 1.092 immediately after the BoC decision but has settled to be little changed on the day around the 1.090 mark.
In war news, the US announced overnight it will send Ukraine 31 tanks, adding to an earlier German commitment to supply top-line tanks. This adds to a broader trend of allied nations giving Ukraine increasing powerful weapons to counter Russia.
Yesterday, domestic (and Australian) data hogged the market’s attention for a change yesterday. NZ’s Q4 CPI inflation came in a tick above market expectations at 7.2% y/y – the same rate as in Q3. But that confirmed expectations of an undershoot of the RBNZ’s 7.5% forecast. Non-tradeable inflation also undershot RBNZ expectations while annual inflation in the trimmed mean measures eased. However, it was not one way traffic, core measures of annual inflation like the CPI ex food and energy pushed higher (from 6.3% to 6.7%) and the RBNZ’s sectoral factor model (released later in the afternoon) also pushed up to 5.8% – another new high since 1993.
In Australia, Q4 CPI annual inflation at 7.8% printed above market expectations of 7.6%. But, in contrast to NZ, the core measures looked more decisively above expectations. The trimmed mean surprised on the high side and along with upward revisions saw the annual rate lift to 6.9% from 6.5%. Relative to the RBA’s forecasts, headline inflation is a little lower than the 8.0% forecast but underlying trimmed mean inflation is higher than the 6.5% forecast by the central bank. NAB thinks this data firms up the RBA to hike by 25bps in February and another 25bps in March.
The mixed signals from the NZ CPI initially saw limited market reaction, but rates pushed lower later in the day as some local banks changed their RBNZ rate views to include a 50bp hike in February rather than a 75bp hike seen previously as well as some lowering in the forecast peak in the OCR. A stronger than expected AU CPI in the afternoon partially reversed the decline in NZ rates for a period but rates closer meaningfully lower on the day.
The CPI outturn left us more convinced that the RBNZ does not need to raise its cash rate by 75bps at its meeting on February 22. Unfortunately, it leaves us equally convinced that, in the eyes of the central bank, it will be a line ball call. We didn’t see enough in the CPI to convince us that the RBNZ will change its mind regards its previously signalled 75 basis point hike at the February meeting. Of course, that could still change ahead of the decision with more important data to be released between now and then, including next week’s Q4 labour data. Also important will be where market pricing settles ahead of the decision.
Market pricing for the RBNZ February meeting moved from being consistent with roughly an even chance of either a 50bp hike or a 75bp hike yesterday morning to being consistent with around a 60% chance of a 50bp hike at that meeting by the end of the day. It’s a market not yet convinced one way or the other.
NZ interest rates were generally lower and steeper across the bond and swap curves yesterday. NZ 2-year swap rates fell around 13 bps on the day, to close around 4.885%, and back toward the lows of last week. This saw a steepening in the NZ swaps curve with longer end rates stickier, with NZ 5-year swap rates down 8.5 bps and 10-year swap rates down about 4bps.
NZ rates movements were opposite to those in Australia, with AU swap rates sharply higher and flatter across the curve following the AU CPI data. AU 2-year swap rates rose nearly 20 bps (with an intraday swing approaching 30bps), while the AU 10-year swap rate nearly rose 13 bps on the day. AU bond futures stabilised overnight.
In currencies, NZD pushed a touch lower overnight extending yesterday’s mild underperformance. NZD took a look at 0.6450 and opens this morning around 0.6470. AUD added more than 1% after the AU CPI, but gave up some gains overnight as last August’s high started to come into view.
NZD/AUD retreated around 1% during yesterday to around 0.9140 from 0.9230 pre the data, reflecting the opposite movements in NZ and AU interest rates on the day.
It is not often you see the NZD and AUD at the opposite ends of the G10 currency movement table. NZD/AUD opens this morning around 0.9130. NZD is also lower on the other key crosses with NZD/JPY down about 1%, NZD/GBP down 0.9%, and NZD/EUR 0.7% lower.
In other news, NZ’s new Prime Minister, Chris Hipkins, was sworn in and the RBNZ and Minister of Finance revealed they had agreed a new framework for managing NZ’s foreign reserves. The new framework will bring an increase in NZ’s foreign exchange reserves, although the transition will take place over a number of years. None of this had any discernible impact on market prices.
Following a relatively lively session yesterday, there is nothing on the domestic data calendar today and Australia is on holiday setting the scene for a quiet local session today. Overnight there is a range of US data scheduled including Q4 GDP and PCE inflation, but no major indicators from elsewhere around the globe.
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