Risk appetite improved a bit overnight with more signs US wage growth is slowing. Equity markets are higher, the USD is a touch lower after paring earlier gains. US yields are a touch lower.
The US Employment Cost Index showed wage inflation slowed a touch more than expected to 1.0% q/q in Q4. It was 1.2% in Q3. This confirms other indications that US wage growth has peaked and is slowing. More encouraging signs for the Fed that it is starting to get on top of inflation as it begins its two-day meeting. But at an annualised 4.0%, this ‘composition adjusted’ wage inflation will still be seen as being too high. The Chicago PMI and US consumer confidence also printed under expectations adding to signs of economic cooling.
Market movements have been mild. Fed market pricing remains locked in for a 25 bp hike later this week, but the softer data will have more wondering if a pause is imminent. There has been some trimming of Fed hike expectations beyond this week’s meeting, but markets still favour another 25 bp hike in March.
Euro area Q4 GDP managed the slimmest of gains. But against expectations of a 0.1% dip, it raises hopes of recession being avoided. Publication of Germany’s CPI data was postponed due to technical problem.
In currency markets, there has been little net movement. USD sits marginally lower on the day after the softer US wage data saw it pare earlier gains. EUR took a look down towards 1.080, before turning around and extending gains to around 1.086 as the USD softened. USD/JPY dipped under 129.80 post the US wage data but has recovered to now sit broadly unchanged.
Risk appetite improved after the US wage data but dipped in Asia yesterday, not helped by Samsung posting weaker than expected Q4 results. Equity indices were broadly lower across the region. China’s CSI 300 closed down 1.1%. This was despite China’s January PMIs bouncing back into the positive territory, following the end of the zero-Covid policy. The manufacturing sector was only just into the black and met expectations, but the services PMI rebounded strongly with 54.4 coming in firmly above expectations. Other data showed China industrial profits were down 4.0% in 2022. Old news.
IMF raised its 2023 world GDP growth forecast to 2.9%, up from 2.7% forecast last October, supported by China’s reopening. The organisation also indicated inflation is likely past its peak and will trend lower from 2022’s 8.8% to 6.6% in 2023 and 4.3% in 2024. Lower but not low.
NZD tried to rally after China’s PMI data yesterday, but it came to little as risk appetite wavered. The NZD dipped under 0.6420 overnight, before USD weakness returned NZD back above 0.6450. A 3.2% lift in wholemilk powder prices at the GDT Pulse auction overnight can only have helped.
AUD dipped on the weaker retail sales yesterday but more so as risk appetite softened. AUD fell under 0.7000 for the first time in a week overnight, before recovering. NZD/AUD opens this morning near unchanged at 0.9160.
Australian retail sales fell heavily in December, down 3.9% m/m, well under expectations of a 0.2% dip. This could be distorted by changing seasonality associated with Black Friday/Cyber Monday sales. But that did stop AU rates dropping around 5-8 bps across the swap curve by the time we left yesterday. Overnight AU bond futures regained composure with the likes of 3 and 10 year yields retracing to be around 2-3 bps lower than pre-retail levels.
US bond rates fell after the wage data, driven by the front end. Upon settling, US 2-year bond rates are down 2 bps, while 10-year rates are marginally lower at 3.53%. Core European bond yields are generally 3-4 bps lower.
Domestic rates took another leg higher yesterday, despite some month end bond buying. The move higher initially followed prior moves from offshore then extended upwards following the China PMI data and perhaps on some nerves ahead of today’s likely strong labour market data.
NZGB yields saw a broadly parallel move higher, up around 4bps across the curve. NZ swap rates were higher and flatter, with 2-year up 6 bps, 5-year up 5 bps, and 10-year up 2 bps. At 5.00%, NZ 2-year swap rates closed back at where they were before last week’s NZ CPI data.
Market pricing for the RBNZ February meeting is consistent with around a 60% chance of a 50 bp hike and a 40% chance of a 75 bp hike, as we head into today’s important Q4 labour market data.
In the day ahead there will be domestic focus on Q4 labour market data this morning, which we expect to show a very tight labour market and strong wage inflation. This is the last piece of major domestic data before the RBNZ’s February MPS. Any material deviation from expectations could cause market movement. We see the data as more likely to be NZD-positive than negative.
Over the next 24 hours there are some meaningful indicators out of China, EU, and the US with market moving potential. This ahead of the FOMC meeting tomorrow morning at 8am NZT and the ECB and BoE overnight tomorrow.
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