US equities are higher after yesterday’s weak close. US short end rates are lower, while longer term rates are steadier. US dollar is broadly unchanged, while somewhat better risk appetite sees NZD outperform.
The BoE hiked 25bps, taking its Bank Rate to 4.25%, and maintained guidance that further tightening is possible if inflation pressures warrant. The minutes noted ‘if there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required.’ So, no overt pivot to pause yet. The vote was 7-2, with the two dissenters for no change.
Market expectations had moved to firmly favour a 25bp hike after the prior today’s strong inflation data. The BoE noted that ‘CPI inflation increased unexpectedly in the latest release, but it remains likely to fall sharply over the rest of the year’. BoE Governor Bailey suggested that there were some signs February’s inflation reading was a ‘one off’.
Market pricing continues to see a better than even chance that the BoE hikes another 25bp in May, but as trimmed peak pricing closer to 4.5% from the closer to 4.75% seen yesterday. Short end gilt yields initially edged higher after the BoE, before continue their downtrend to be around 20bps lower on the day, similar to the declines seen in core European yields. 10-year Gilt yields are around 8bps lower, while core European equivalent yields are down around 11-14bps. GBP saw some volatility around BoE release, but settled firmer, up around 0.3% on the day, back around the 1.23 mark.
The BoE’s eleventh consecutive hike follows yesterday’s 25bp hike by the Fed and last week’s 50bp hike by the ECB. And, in the process, distinguished between financial stability operations and monetary policy tools much like those other central banks. The BoE judges that ‘the UK banking system maintains robust capital and strong liquidity positions’ going on to say that the UK ‘banking system remains resilient’.
And for more signs of how central banks are distinguishing between financial stability and monetary policy operations – the Swiss National Bank hiked 50bps overnight despite the issues with Credit Suisse.
US equities are higher. The S&P500 was up as much as 1.8%, currently sitting up 0.8% on the day. The NASDAQ is up 1.3%.
The equity bounce follows a weak close yesterday. The initial market reaction to yesterday morning’s Fed policy update was for lower rates, modestly stronger equities, and a weaker USD. But shortly after the Fed, US Treasury Secretary Yellen said that regulators aren’t looking to provide ‘blanket’ deposit insurance or guarantees to stabilise the US banking system without working with lawmakers. That saw risk sentiment baulk as it jarred with previous indications on the direction of travel. Yesterday, the S&P500 fell heavily into the close to finish down 1.65%, a sizeable reversal from being as much as 0.9% up shortly after the Fed announcement.
Overnight, risk appetite recovered somewhat with the VIX ‘fear’ index back under 22 and US equities rebounding.
US jobless claims still looked strong at a headline level, but the details revealed the number of states whose unemployment claims have risen more than 25% over the past year has climbed to its highest level since mid-2019 suggesting some cracks are appearing in the US labour market.
US rates are lower at the short end and higher at the longer end, seeing a steeper curve. 2-year Treasury yields are down around 5bps on the day and down about 24bps from pre-Fed levels. US 10-year Treasury yields did push up through 3.50% overnight, before settling back to around 3.44% currently. So similar level to around the NZ close yesterday and down around 10bps since yesterday’s Fed announcement.
In currencies, the US dollar is little changed from where we left it yesterday afternoon, but still around 0.8% lower than pre-Fed levels.
The NZD saw some volatility earlier yesterday, up on the Fed, down on Yellen comments, then recovered with global risk appetite and outperformed. Overnight, the NZD consolidated the gains to sit around 0.6270 currently, up around 1.0% from pre-Fed levels and just under its 100-day moving average.
The NZD is generally higher on the key crosses, grinding higher against the AUD overnight, seeing NZD/NZD back up around 0.9350 and eyeing month to date highs around 0.9370. NZD/GBP hovers around 0.5100, up 0.5%.
There was minimal market reaction to RBNZ Chief Economist Conway’s speech yesterday, although NZ rates did trim declines later in the day. Comments like ‘household balance sheets are in good shape in aggregate and the banking system is very well capitalised, meaning there is no conflict between monetary policy and financial stability’ was interesting. It alludes to the recent global financial ructions not having put the RBNZ off stride.
Another thread was the Bank’s attentiveness to inflation expectations, and wider pricing behaviour, rather than just the CPI itself. Conway noted it is unclear if inflation expectations are falling fast enough but welcomed signs demand is slowing. All up, nothing to materially shift views amid the strong influences emanating from elsewhere.
Domestic rates continued to get thrown around by offshore forces. Yesterday’s Fed announcement, taken as less hawkish than it might have been, resulted in lower rates across NZ’s bond and swap curves, both with a steepening bias. NZGB yields were down about 8-10bps at the short end with longer end yields around 2-5bps lower, with similar sort of moves in swap rates.
In the coming 24 hours, Japan CPI is out in during the local session where headline inflation is seen easing but core lifting. Then overnight there’s a suite of PMIs due along with UK retail sales and consumer confidence and US durable goods.
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