US stocks plunged as some lackluster retail earnings results show how damaging a high inflationary environment can be. Bonds found a safe haven, as did the JPY and CHF. The USD was also well supported. The NZD fell back towards 0.63, but the GBP was the worst performer following another strong inflation report.
Yesterday’s noticeable rise in risk sentiment turned out to be a one-day wonder, with a sharp reversal overnight. The US stock market was spooked by another lackluster earnings result from a major retailer, this time Target, after Walmart’s poor result yesterday. A weak Lowe’s result added to the unease and sent the market into a tailspin, with the S&P500 down almost 4%, led by a 6-7% drop in the consumer staples and consumer sectors discretionary.
Retailers have noted that soaring costs are hitting their profit margins, with rising prices not keeping pace. It’s a reminder of the scourge of inflation and the massive damage it can do to an economy. Yesterday’s comments from Fed Chairman Powell are fresh in memory that he is determined to bring inflation down to 2% and that he will raise policy rates above neutral if necessary.
Adding to the inflationary backdrop, strong CPI data from the UK and Canada was reported. UK inflation data was about as bad as expected, with the annual headline CPI hitting a 40-year high of 9.0% and the base rate at 6.2%. Along with rising fuel and food prices, a 54% rise in consumer energy bills added to the bottom line, and another big increase in October is expected to push the headline rate above 10% later this year. year. Based on these figures, the UK is in the worst position of the major developed countries, both in terms of the rate of inflation and the duration of the peak.
The high risk of recession as confidence is shaken by these numbers has made the BoE reluctant to go all-in with a large and quick policy tightening, drawing critics like former Governor Mervyn King. He said the BoE should have acted sooner and “the idea that an interest rate of 1% while wages are rising between 5 and 7% is going to have a lot of impact on that inflation rate is really very strange”. Market prices saw a series of increases throughout the year, but a fairly constrained trajectory compared to other countries, given the BoE’s reluctance to be too aggressive.
Annual headline CPI inflation in Canada hit a 30-year high of 6.2% and the average of the three core measures was much stronger than expected at 4.2%, moving further away from target. The market’s reaction was dampened by the fact that it is already forecasting a 50 basis point hike at the next meeting and a key rate of 3% by the end of the year.
Housing starts and housing permits in the United States showed signs of recovery, with the slowdown still in its infancy, with rising mortgage rates and falling mortgage applications suggesting a significant slowdown ahead. to come.
For the bond market, the negative pulse in the equity market and the growing risk of a global recession as central banks belatedly attempt to rein in the difficult inflation situation more than offset the impact of high inflation, yields US Treasuries falling across the curve. The 2-year rate is down 3 basis points to 2.67% and the 10-year rate is down 10 basis points to 2.89%, the latter reversing the gain of the previous session.
In currency markets, safe havens outperformed, with the yen and CHF up 0.7% overnight, the latter helped by a few hawkish comments from the SNB governor in Jordan. Switzerland still has low inflation by global standards at 2.3% and has yet to raise the key rate from the minus 0.75% level. Jordan said the SNB was ready to act if inflation risks materialized.
The NZD fell 0.6% against New Zealand close to still trading above the 0.63 mark, after hitting a high of 0.6370 during local trading hours. NZD/AUD continues to oscillate around 0.9050, with AUD showing a similar fall, now decisively below 0.70.
The FT reports that foreign investors sold a record $35 billion worth of renminbi-denominated bonds in the first four months of 2022, putting some numbers to what has been an obvious trade as China loses its edge in interest rates for the benefit of the United States and the economy. a significantly weaker trajectory that can only lead to further weakness in the currency. A weaker yuan remains a major hurdle for the NZD and AUD over the next few months.
The pound was the weakest of the key majors we track, falling 1% overnight to 1.2350 on strong CPI data, although that came as no surprise. In this case, the weaker currency could be explained by purchasing power parity theory, with higher inflation in the UK compared to elsewhere requiring a weaker offset currency to maintain equilibrium, in especially with a central bank reluctant to tighten policy too aggressively. The Euro is also on the soft side, down 0.5% overnight to 1.0480.
The domestic rates market performed well yesterday amid rising US rates during the overnight session, with NZGB yields flat across much of the curve, with some lingering weakness at very long term, with 20-30 year rates up 2 basis points. The swap curve also showed little change in rates. Sentiment in the New Zealand rates market improved after Australian payroll data did not come in as strongly as expected, leading to lower Australian rates. The move likely reflected market positioning ahead of the announcement, as the RBA is more focused on messaging its corporate liaison and surveys that show wage inflation rising. Given its construction, the official wage price index will take time to adapt to developments in the real world.
In the day ahead, during local trading hours today, there will be interest in the Australian jobs report, likely another strong report that will keep the pressure on the RBA to deliver rate hikes substantial, after a slow start to the tightening cycle. The New Zealand budget will show an easing of fiscal policy, as reported by the Finance Minister, with a delay in achieving operating surpluses despite the recent run of better than expected fiscal metrics. The bond tender program will be expanded by at least $5 billion a year to capture the RBNZ’s planned sale of bonds purchased under government QE. Elsewhere, only second-tier economic data is out in the US tonight.