US equities lower as more central bank speakers talk higher rates. But US rates oscillate; US 10-year bond rates down a touch on the day

US equities are generally lower as hawkish central bank speak continues. Rates have oscillated, while currency movements have been well contained.

Not a lot of new news, but central bank speakers continue to holler their hawkish messages. The S&P500 is down around 0.9%, while the NASDAQ is off 1.3%. European bourses were generally stronger supported by slew of positive earnings updates. The Stoxx 600 closed up 0.3%.

The initial market reaction to Fed Chair Powell’s comments yesterday was quickly reversed just after we hit the send button yesterday morning. After initially falling below 3.60%, US 10-year treasury yields then quickly rebounded up toward 3.69% as Powell went on to say ‘the reality is that we’re going to react to the data. If we continue to get strong labour market reports or higher inflation reports, it may well be the case that we have to do more and raise rates more than is priced in.’

But the Fed being data dependent is hardly a revelation and it wasn’t long before 10-year yields were back to where they were pre-Powell around the 3.65% level. The drift lower encouraged by President Biden vowing to not allow the US to default on its debt, as he called on Congress to raise the debt ceiling.

Overnight, we had another wave of Fed speakers. New York Fed President Williams noted that most officials forecast the Fed funds rate in a range of 5% to 5.25% by the end of the year and ‘that still seems a reasonable view’. Quarter percentage point ‘seems like the right size’. But he added that there is still a lot of uncertainty around the inflation outlook and if the situation changes, the central bank could move faster than the 25bp pace, while also noting that policy needs to stay restrictive for ‘a few years’. Fed Governor Cook stuck to the party line of ‘we are not done yet with raising rates’ and ‘we are now moving in smaller steps.’ Minneapolis Fed President Kashkari was on the circuit again noting the FOMC needs to do more on tightening policy and expects the Fed Funds rate above 5% at some point this year.

US 10-year yields again tested 3.69% after Williams and Cook spoke before peeling back to currently sit down a few points around 3.63%.

In Europe, ECB speakers continue to lean hawkish, with another 50-bps increase widely expected in March. ECB member Schnabel suggested there is more hiking to come while the Bank’s Knot, who tends to be more hawkish, said that the Bank may need to deliver another half-point interest rate increase after a planned hike of that size at next month’s meeting. The ECB’s Kazaks said there is no reason to pause after March and rates must hit ‘significantly’ restrictive levels. Core European bond yields were generally 1-3bps higher overnight.

There was little net movement in currencies overnight. The USD oscillated around no change on the broad indices. EUR traded a circa 0.4% range and currently sits little changed around on the day around 1.0730.

Rate movements generated a little more intraday action in USD/JPY but netted to little change overall. USD/JPY currently sits 131.30. GBP topped the major’s leader board overnight albeit with only a 0.3% gain. NZD/GBP is down 0.5% to around 0.5220.

The NZD jumped above 0.6350 early yesterday morning only to unwind to under 0.6300, before settling not far from 0.6320 for much of the day as the dust settled post-Powell. Overnight the NZD again tested up toward 0.6350 before sagging with US equities, to open this morning around 0.6320.

Looking through yesterday morning’s Powell-induced volatility, the AUD remained supported by the afterglow of the more hawkish RBA commentary from earlier in the week. AUD took a look up toward 0.7000 but couldn’t sustain the move falling back to 0.6940 currently as risk sentiment faded.

AU interest rates at the shorter end have largely maintained gains post the RBA, with the likes of the 3-year AU bond future up 16bps in yield terms since the RBA statement. The 10-year AU bond future has not held onto all of its move higher yield but is still up around 11bps in yield terms over that period.

NZD/AUD extended down to around 0.9070 overnight, briefly dipping below its 200-day moving average around 0.9090 in the process, before some recovery ensued to sit near 0.9100 currently.

In other news, the NZ Treasury estimated recent flooding would add around 0.4 percentage points to inflation over the first half of 2023 compared to what would have otherwise been the case. It also noted that the overall impact of GDP ‘could be roughly neutral in the March quarter, and GDP could be boosted in later quarters.’ Meanwhile, the government announced a range of policy changes including lifting the minimum wage by 7.1%, to $22.70 per hour, on 1 April and not proceeding with a proposed social insurance scheme in this term. There was no discernible market reaction to any of this.

The NZ rates market saw the recent bounce in yields extend yesterday, with fresh impetus and catch up from the hawkish RBA announcement at market close the day before.

NZ swap rates rose across the curve to push further above the multi-month lows hit soon after the softer Q4 labour market data earlier this month. There was a mild flattening bias with shorter dates up 6 to 8 bps and long longer dates about 5bps higher. Market pricing is back to seeing a peak in the OCR at 5.25% by the RBNZ July meeting. The 2-year rate closed at 4.94% and the 10-year rate at 4.255%. There were similar moves for NZGBs, albeit with a small outperformance against swap in the shorter dates.

There is no major data on the local calendar today, although the Fed’s Waller is scheduled to speak within the next hour. Over the next 24 hours, the Riksbank is expected to follow in the ECB’s footsteps with a 50bps hike and there will be some interest in the latest US jobless claims figures where market expectations are for a bounce against the recent downtrend.