Global rates lift on German inflation, US ISM; US 10-year hits 4%. US dollar lower. AUD held back by weaker GDP, CPI

Global rates are mostly higher, while equities are mixed, and the US dollar is lower. US 10-year rate touches 4%. The NZD is up more than 1%.

Stronger Chinese PMIs yesterday set the tone for better risk appetite heading into the Northern Hemisphere session. But higher than expected German inflation data saw rates lift and equities turn lower.

German CPI rose 1.0% m/m in February. This saw annual inflation rise to 9.3% against expectations of a dip to 9.0%. Stronger German state CPIs out earlier in the session gave a sense of what was to come in the national figures.

It maintains pressure on the ECB to keep lifting rates with the market back to pricing the policy target rate at about 4%, implying another 150bps of tightening from here. The German inflation data follows stronger than expected Spanish and French inflation data adding to upside risk for the overall EU data out tonight.

ECB speakers remained hawkish, with Villeroy suggesting high inflation meant the Bank must persevere on policy, adding that it should reach the ECB terminal rate by September at the latest. European rates rose with core 10-year yields up in the order of 4-7bps.

In contrast, BoE Governor Bailey was more equivocal on the forward policy path than he might have been in released text saying ‘I would caution against suggesting either that we are done with increasing Bank Rate, or that we will inevitably need to do more’ going to say ‘some further increase in Bank Rate may turn out to be appropriate, but nothing is decided.’

The market trimmed expectations of the BoE rate peak by about 10bps, seeing closer to three 25bp hikes by year’s end effectively removing the decent chance of a fourth hike that had previously been built in. Gilts outperformed other European bonds, with 2-year yields down about 2bps while 10-year yields rose 2bps.

The US ISM manufacturing index was 47.7 in February, marginally higher than January’s 47.4 but a touch under expectations and still contractionary. Employment dipped back into contraction, while new orders became less contractionary. Prices paid jumped to 51.3 from 44.5 marking the first expansionary print since September.

US Treasury rates are up around 6-9bps across the curve, paying most attention to the inflationary aspects of the ISM survey that added to the tailwind from higher European rates. The US 10-year tested just above 4%, but again resistance held at that point, with rates currently up 7bps at 3.99%.

Equities have oscillated but are generally lower, as the contest between better activity data is challenged by higher rates. The S&P500 is a touch lower for the day, while the Euro Stoxx 50 closed down 0.5%.

In currencies, the US dollar is weaker with the broad index down 0.5%. EUR marched higher overnight, currently up 0.8% at around 1.066.

After poking above 1.21 yesterday, GBP underperformed overnight as yield differentials weighed. GBP saw little net change overnight against the generally weakening USD and is near the middle of the range it has traded over much of the past month at around 1.2020.

Chinese PMIs were stronger across the board yesterday and stronger than expected. It shows a strong rebound after the Covid restrictions were stopped, with manufacturing posting its biggest improvement in more than a decade. Positive signs ahead of next week’s National People’s Congress annual meeting. Meanwhile, Moody’s raised its 2023 China GDP growth forecast to 5% from 4%, adding to the positive vibe. Asian equity markets closed generally higher, with China’s CSI 300 up 1.4%.

Yesterday, AU Q4 GDP and January CPI (not a complete CPI basket) both meaningfully undershot expectations. This saw AUD dip, and test below 0.6700, before the stronger Chinese PMIs drove a recovery in risk appetite and commodity currencies like the AUD and NZD higher. AUD currently sits near 0.6760, up around 0.5%.

NZD strode higher after the Chinese PMI data and added to those gains overnight as the USD weakened to currently sit around 0.6260, up more than 1%. NZD outperformed AUD in the wake of the softer Australian data, with NZD/AUD extending gains overnight to open this morning up around 0.8% at around 0.9260. NZD is stronger on the other major crosses too, with NZD/GBP up 1.2% to be back above 0.5200, NZD/EUR up 0.4%, and NZD/JPY up about 1%.

After pushing higher in yield early yesterday, NZ rates quickly reversed course after the softer Australian GDP and CPI data. AU rates lurched lower post data release, dragging NZ rates down in the process. AU swap rates were down in the order of 10-14bps across the curve near the time of the NZ close.

NZ 2-year swap had poked up a few bps to 5.43% before dipping and closing at 5.33%, down 4.5bps on the day. Following a similar pattern, NZ 10-year swap closed a bit over 6bps lower to just over 4.63%. NZGBs underperformed swap at the longer end, with the yield on the April 2033 bond down just over 3bps. Yesterday morning, NZDM announced the week beginning 6 March as to when it expects to launch the syndication of the new May 2030 NZGB.

The day ahead sees NZ’s terms of trade which we think will show another fall as import prices rise and export prices fade, but the data does not tend to move markets. Overnight, European unemployment and CPI data are due, with the German CPI pointing to upside risk as did the French and Spanish readings from the night before. Initial jobless claims are due in the US.