Last week’s hawkish FOMC meeting continues to trickle down to financial markets. Reflationary sentiment continued on Friday as stocks and commodity prices retreated again, the US Treasury curve flattening sharply and the dollar strengthening. In Australia, the market has advanced the expected timing of the first RBA hike to the end of 2022, while in New Zealand, the market is now considering an almost 70% chance of a hike in February 2022. The NZD remained under pressure amid commodity price reversals and risk, hitting a new year-to-date low on Friday and ending the week around 0.6935.
The only real news on Friday night was the Fed Chairman of St Louis Bullard’s interview with CNBC, in which he said his personal forecast was that the Fed would start raising interest rates at the end of 2022. Well Of course, the Fed’s dot plot indicated that seven officials believed it would be appropriate to start raising interest rates in 2022, so it shouldn’t have been a complete surprise that Bullard, whose opinions have fluctuated between very accommodating and very hawkish during his tenure in the FOMC, was one of them. Nonetheless, the market’s immediate reaction was to raise USD and US rates again. Bullard added that it would probably take “several meetings “ to adjust the details around the fraying.
In the bond market, the flattening of the yield curve was the main theme again on Friday. The US 2-year rate rose 5 basis points, to 0.25%, as the market moved the Fed’s first hike to December 2022. In contrast, the US 10-year rate fell 6 basis points, at 1.44%, below its level before the FOMC meeting. , while the 30-year rate fell 8bp to just over 2%. At first glance, the flattening of the yield curve, combined with further declines in inflation expectations (10-year “breakeven” inflation in the United States -5 bps to 2.24%), suggest that investors are less concerned about the risk of high inflation. However, position unwinds almost certainly worsen market movements and it remains to be seen how long this could take to unfold.
Equity markets were broadly down on Friday, with the S & P500 losing 1.3%, the NASDAQ 0.9% and the Eurostoxx 600 down 1.6%. Sector rotation continues, with “reflationary trade” favorites (including banks, energy and materials) underperforming and tech stocks outperforming. Likewise, commodity prices (excluding oil) remain under pressure with, for example, copper down 1.8%, bringing its loss over the week to 8.6%.
The USD resurgence continued on Friday, with BBDXY hitting a two-month high. The rise in short-term rates in the United States and the rise in risk aversion have been part of the story behind the big upward movement in the USD last week (+ 2% on a BBDXY basis) . There was also undoubtedly a balancing of positions, with investors unwinding popular dollar short trades after the Fed meeting.
Commodity currencies underperformed again on Friday, with the NZD and AUD posting new year-to-date lows. Both currencies were down around 1% on Friday and nearly 3% on the week, while the NOK and CAD were also down sharply (-1.4% and -0.9%) despite holding oil prices. The NZD ended the week around 0.6935 and the AUD around 0.7480. The NZD / AUD cross remains closely tied to the range and ended the week around 0.9270.
The JPY was the best performer of the major currencies, flat against the USD on Friday at 110.20. The euro lost a relatively modest 0.3%, but that still left it at a two-month low of 1.1865.
Back in the interest rate markets, Australia saw further upward pressure on short-term interest rates on Friday as the market began to increasingly challenge the RBA’s claim that rate hikes were unlikely until 2024. “as soon as possible ”. The move gathered pace after Westpac economist Bill Evans put forward his call for the timing of the first RBA hike in early 2023. The market decided to price the first RBA hike in early 2023. ‘by the end of 2022, with two more 25bp hikes expected by the end of 2023. Australia’s 3-year swap rate rose 7bp on Friday, to a more than 12-month high of 0.51 %, after the 7bp increase the previous day. It seems likely that the market will again start questioning the RBA’s commitment to its 3-year yield target, pushing the April 2024 bond yield above 0.1%.
As the market anticipated rate hike expectations from the RBA and the Fed, New Zealand’s short to mid-curve wholesale interest rates remained under upward pressure. The 2-year swap rate rose 4 basis points on Friday, to 0.68%, bringing its movement over the week to +16 basis points. Market prices for the February meeting rose to 0.42%, indicating about two-thirds chances of a rate hike. The market is even valuing a sizeable 8bp for a rise in November 2021. Like other markets, the New Zealand yield curve experienced a significant flattening on Friday. The 10-year swap rate fell 3 basis points, mimicking the movement of the night before on US Treasuries. This resulted in a significant 7bp flattening of the 2- to 10-year swap curve to 122bp, its flattest level since February.
New Zealand Debt Management will announce the July government bond bidding schedule on Wednesday, and we believe it will likely be increased from the current $ 300 million / week in nominal bonds to something in the order of $ 500 million / week. We believe the RBNZ will keep its QE pace around where it is now ($ 200 million this week), which would allow it to see how the market adapts to the need to cut supply further. of bonds. This could provide a useful “dry run” when the RBNZ decides to stop the program altogether.
Other than the NZDM announcement, there is little on the agenda for domestic data this week. Offshore, attention should return to the Fed’s comments, with 14 speeches lined up this week. The highlight is Fed Chairman Powell’s testimony to Congress on Wednesday morning. Elsewhere, European PMIs “flash” Wednesday evening while the Bank of England’s monetary policy meeting is Thursday evening.