A generally stronger set of US data has seen interest rates push up and risk asset prices subdued. US bond yields are generally higher, led by the longer end, while equities are marginally lower and the US dollar stronger. Commodity prices are generally lower, and the NZD slipped under 0.63.
US retail sales was keenly anticipated and came in hot. Total sales rose 3.0% m/m in January which was stronger than expected while the core ex auto and gas measure smashed expectations with a 2.6% increase. This all points to robust consumer demand. Gains were broad based with all 13 retail categories rising, suggesting the possibility of an underlying factor.
It is interesting that we have seen similar down and up patterns (over and above usual seasonality) in December/January spending indicators in Australia and NZ. Perhaps suggesting some trading day or other general timing influence rather than an indicator of trend. It is certainly difficult to reconcile the better-looking headline spending numbers with some woeful consumer confidence readings in all these jurisdictions.
Unseasonal warm weather in the US is another likely driver which also seemed to help the NAHB housing index print at a less weak 42, up from 35 and better than expected. US industrial production was flat but was held down by an 8.9% plunge in utilities output on reduced demand for heating. Meanwhile, the US Empire manufacturing index became a lot less negative in February and outperformed expectations – again the weather seemed to play a role along with China reopening.
The balance of US data has seen the Atlanta Fed increase its Q1 GDPNow estimate to 2.4% from 2.2%.
US bond yields rose across the curve, driven by the longer end of the curve on the prospect of the Fed keeping rates higher for longer. US 10-year yields are up around 7bps and have pushed through the 3.80% mark, while 2-year yields are up 1bp.
It was a case of good news is bad news for risk assets. US equity markets opened lower on the retail sales data and higher rates, despite gains across European bourses. The S&P has recovered some ground but currently down around 0.3% for the day.
The UK CPI fell by more than expected in January, with annual inflation easing to 10.1% and under the 10.3% consensus. UK CPI inflation is now down a full percentage point from its 41-year high of 11.1% peak back in October last year. The inflation downside surprise was reinforced by the core measure falling to 5.8%, well under the 6.2% expected, and the first clear step lower from the 6.5% peak back in September. Still too high, but more definite signs of moving in the right direction helped by lower petrol prices.
UK Gilt yields buck the global trend higher, with the 10-year yield down 3bps and shorter-end yields down 6-8bps, unwinding some of the previous day’s large gains following the strong labour market data.
The ECB’s Lagarde spoke at the European parliament and reiterated the intention to hike 50bps in March and to follow a meeting by meeting approached thereafter.
A bit more action in currency markets for a change. The USD is stronger against all the major G10 currencies with risk generally on the back foot. The broad US dollar indices are up around 0.8%. The higher global rates environment continues to hurt JPY, with USD/JPY punching up 0.8% and through 134 to another year-to-date high.
GBP underperformed, initially gapping down on the weaker inflation data and falling yield differentials, before extending losses as the USD strengthened. GBP currently sits around 1.20, down about 1.4% on the night.
The NZD drifted down toward 0.63 yesterday and has slipped below that mark overnight amid ebbing risk sentiment and USD strength. The NZD dipped to its lowest level since early in the New Year, looking down toward 0.6250, before steadying around 0.6270 currently, down 1.1% on the day.
AUD saw a similar trajectory in trending lower overnight, to dip below 0.69 and down nearly 1.5% against the stronger USD. RBA Governor Lowe spoke at a Senate hearing yesterday but delivered nothing new on top of the hawkish messaging from last week. AU swap rates and AUD pushed lower on the day but that was probably more on souring risk sentiment which extended through the overnight session.
NZD/AUD had another dip under its 200-day moving average of around 0.9090 yesterday but didn’t sustain the move overnight. The pair opens near 0.9100 this morning.
More reports of the significant damage ex-tropical cyclone Gabrielle caused across large tracts of the North Island continue to emerge. Quantifying the full extent of the damage will take some time, but it will be significant. Likewise, the cost of repair and recovery. This includes to local and central government. NZ Treasury Secretary McLiesh said yesterday that Treasury expected ‘to see a very significant cost’ to the Crown. There is time for those costs and economic implications to be incorporated into Budget 2023 (due in May). Despite the extreme weather, local financial markets have remained orderly throughout.
Domestic rates played catch up early yesterday to higher yields offshore following the firm US CPI print the previous night, before easing back a bit later in the day as risk sentiment declined. At one point, the 2-year swap rate had essentially reversed all the previous day’s dip before easing to close just under 5.20%, still up nearly 6bps on the day. The market continues to favour a 50bp hike next week with some chance of a 75bp hike but has moved to reduce the chance of OCR cuts later in the year as it contemplates an OCR higher for longer. The curve flattened with 5-year swap up less than a bp, while 10-year swap dipped late to close down 4bps. The NZGB curve also flattened with shorter-end rates up 5 bps while longer-end rates rose by less than a bp. For next week’s RBNZ meeting, we expect a 50bp hike, but see the decision between a 50bp and 75bp hike as a line ball call.
In the day ahead, not much to excite markets locally. Australian labour market data is out, with the consensus picking a steady, and low, unemployment rate of 3.5%. Overnight, there is a host of second tier US data and yet more Fed speakers with Mester and Bullard on the circuit.
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