More US regional bank concerns and some softer data sees global equities and bond yields lower. Oil prices have slumped near 5%. S&P500 currently sits down around 1.1%. US 10-year yields are down about 14bps. The US dollar is marginally softer, JPY has bounced, NZD and AUD have outperformed and NZD/AUD is back above 0.93.
Concern around US regional banks has flared again, merely a day after JPMorgan’s purchase of First Republic. Investors seemingly disappointed not to see any change to the FDIC’s deposit insurance in the receivership process and as the market focuses on those with exposure to commercial real estate. PacWest and Western Alliance are among a number of regional banks under significant selling pressure, with share price declines in the order of 42% and 27% respectively at one point. The KBW banking index dropped nearly 5.6% before paring some losses.
This weighed on broader equities, with the S&P500 down nearly 2% at one point before recovering somewhat. Financials were among the laggards, although energy was the weakest sector weighed down by a circa 5% slump in oil prices on global growth worries amid more signs of a slowing US labour market.
The US JOLTS report saw job openings fall further than expected in March adding to signs that the labour market is cooling. The quit rate eased to 2.5% from 2.6% suggesting employees are seeing diminishing prospects of switching to higher paying jobs, although the quit rate remains above its 2.3% pre-pandemic average.
US Treasury yields fell sharply firstly on the risk off banking sector related tones and extending lower post the JOLTS data before stabilising. No market meander into the Fed meeting tonight. The market still largely (but now not fully) prices a 25bp hike at tomorrow morning’s announcement but has increased the prospect of rate cuts later this year. 2-year Treasury yields fell as much as 20bps before regaining composure. US 10-year yields are currently down around 14bps to sit near 3.43%, essentially unwinding all of yesterday’s lift.
In Europe, April’s CPI came in close to expectations. Headline inflation was a tick higher than the final market consensus. But annual core inflation of 5.6% matched expectations and confirmed a slight easing from March. Meanwhile, the ECB’s Bank Lending Survey said credit standards had ‘tightened further substantially’ in Q1, adding support to a smaller rather than larger move at the ECB’s meeting overnight Thursday NZT. The market remains well priced for the ECB to deliver a 25bp hike, albeit with a minimal risk of a 50bp move priced in.
In currency markets, the US dollar is marginally softer. EUR had a round trip from near 1.1000 to dip under 1.0950 on the softer data before recovering to currently sit around 1.1000. Risk off supported JPY, reversing some of the post-BoJ weakness. After testing up towards March’s high just under 138, USD/JPY has pulled back to around 136.60 now. NOK lost more than 1%, not helped by lower oil prices.
AUD gapped higher on a surprise RBA hike (more on that below), initially pushing up more than 1% toward 0.6720 before easing back overnight to sit near 0.6660, to be up around 0.5% on the day. NZD has been resilient to the market wobbles, edging back above 0.62, up 0.6%.
NZD/AUD dropped nearly a cent after yesterday afternoon’s RBA hike to around 0.9230, before recovery ensued. A positive GDT dairy auction overnight (prices up 2.5%) added support. NZD/AUD is not far from pre-RBA levels back above 0.93 on open this morning. NZD/GBP is up 0.8% near 0.4980, NZD/EUR is up 0.4% around 0.5640.
Yesterday, the RBA hiked 25bps to 3.85%. A move not widely expected by markets but expected by around one third of economists. The phrase returning inflation to target ‘in a reasonable timeframe’ was prominent in the RBA’s first and last paragraphs suggesting continuing risk of a further increase. The RBA concluded with ‘some further tightening of monetary policy may be required’. In any case, yesterday’s action is a reminder that a central bank pause in tightening does not necessarily mean that a cut is the next move. RBA Governor Lowe, in a speech overnight, noted that April’s pause decision was ‘finely balanced’ and that yesterday, that balance ‘tipped the other way’.
The hawkish surprise saw AU bond and swap curves punched sharply higher with some flattening. Short-end AU swap yields initially jumped as much as 30bps and 10-year AU swap yields rose about 14bps. The market moved to add around 25bps to its anticipated cash rate peak which sits a bit under 4% with not quite half a chance of another 25bp hike priced in by August. Overnight, AU 10-year bond futures retraced all of its immediate post RBA selloff, while AU 3-year bond futures retraced most of the sell-off to sit around 5bps higher in yield compared to before the RBA.
Yesterday domestic rates were higher across the bond and swap curves, reflecting offshore moves in the previous session. Bonds cheapened to swaps (and ACGB’s before the RBA hike), with NZGB yields up by 7-11bps across the curve, whereas swaps rates generally closed in the order of 4-6bps higher.
The RBNZ pre-released another article from the FSR yesterday (an interesting development in itself). The article came across as the Bank not being overly bothered with how the economy has, to date, weathered the rise in interest rates. But it is clearly expecting more strain ahead. There was no market reaction. The full FSR is released at 9am today with associated press conference at 1pm.
Datewise, market attention will be on this morning’s NZ’s Q1 labour market data. Overall, we expect these to be solid. But there is potential for noise and surprises given the likes of the extreme weather events during the quarter, rapidly changing net migration, and even employment changes associated with the Census.
Offshore, we get AU retail sales for March where there seems scope for a downside surprise to the market consensus. EU has labour market data. In the US, the ISM services index is expected to improve marginally. ADP employment is also due. But attention will be squarely focused on the Fed announcement, due at 6am tomorrow NZT, then the ECB overnight tomorrow.
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