US equities, rates and the USD are all modestly higher, supported by a headline GDP print that was above expectations and initial jobless claims pointing to a robust labour market. Domestic rates added to their post-CPI rally as the market pares back RBNZ rate hike expectations. The NZD remains tightly range bound below 0.65.
Overnight there have been a number of US economic data releases. The key one, Q4 GDP, was a touch stronger than expected with the economy growing at 2.9% (all figures here reported as an annualised rate for the quarter), although the data had a soft underbelly, with about half of that reflecting inventory building and barely any growth in underlying demand in the economy (final sales to private domestic purchasers up just 0.2%). Consumer spending was the main engine of growth although continued to show slower momentum (+2.1%), residential investment remained in a deep hole (-26.7%) and business investment remained sluggish (+0.7%). The key core PCE deflator showed in-line inflation of 3.9%.
Second tier releases showed a large $90.3b traded goods deficit in December or a record $1190b for the full year. Durable goods orders were inflated by aircraft orders, with the core measure remaining weak. Initial jobless claims continued their lower-than-expected run, down to 186k last week, and indicative of a robust labour market, although the figures are still possibly distorted by seasonal adjustment issues. They go against the grain of the surge in layoff announcements over the past couple of months – for which overnight you can add another 10,000 job layoffs from DOW, IBM, and SAP – but this might reflect a delay due to severance payments. Continuing claims remain well up from the lows seen eight months ago and suggest it is taking longer for some to find a new job.
The S&P500 is currently up modestly, with both positive and negative earnings announcements and the index supported by a beat from Tesla. US Treasury rates were pushing higher ahead of the economic releases and the 2-year rate subsequently headed a little higher, less so for the 10-year rate, both currently up 4bps for the day and seeing the 10-year rate back close to 3.5%. The USD is also broadly stronger overnight, with the key USD indices up 0.2-0.4%.
The NZD traded briefly above 0.65 overnight but has been in a tight range all week and has spent most of the time consolidating just under that level. JPY has been the weakest of the majors against the higher rates backdrop, with USD/JPY up to 130.30. EUR is down 0.4% overnight to 1.0860. NZD crosses against these are both modestly higher. CAD is the strongest of the majors, with the previous day’s “pause” forward signal from the Bank of Canada doing no obvious harm, while oil prices provide a little support with gains of 1-2% and Brent crude trading just above USD87.
In the domestic rates market yesterday there was further follow-through from Wednesday’s rally post-CPI. More confidence that inflation has passed its peak, weaker non-tradeables inflation compared to RBNZ estimates and local economists believing an increased chance of a dialled-down 50bps hike next month saw OIS pricing for the February meeting slip to 4.82%, implying a hike of 57bps. The closer this figure is to 50bps the higher the chance the RBNZ is likely to deliver the smaller hike.
The two-day rally has seen market pricing of the peak OCR rate down over 13bps to 5.32%. All this continues to feed into the swaps curve, with rates down 5-6bps yesterday, with the 2-year rate down to 4.84%, its lowest close since early October. There was strong demand for NZGBs at the tender, more so for the shorter-dated maturities and rates were down 3-5bps across the curve.
In the day ahead, Tokyo CPI data will give a good heads-up for the national wide CPI figure that comes out later, with headline inflation expected to remain at 4.0% y/y and further upside expected in the core figures. The ANZ business outlook survey should show a lift in confidence and activity indicators – it’s hard to believe the survey could be any worse than December’s offering. In any case January’s result will be out of date with a more convincing boost to confidence likely in future surveys after the resignation of Ardern and new PM Hipkins, who has already met with businesses to hear their concerns about the direction of government policy.
US data on spending and the deflators won’t be of too much interest, given the figures for the quarter have already been released and the monthly breakdown is of secondary value.
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