NZD outperforms, but only slightly higher

Trading for the new week started with mixed performance for stock markets, rising global rates, volatile energy markets and modest currency moves. There was more action in the New Zealand market, with rates rising after a huge print from the CPI, but resulting in only a modest gain for the NZD.

There hasn’t been much news overnight, but traders are watching energy markets closely, given their recent inflationary boost and the movement in gas and oil prices has been volatile. European gas prices experienced another roller coaster, jumping another 15% before falling again. There were few signs that Russia was helping to support the market, with no signs that Gazprom was looking to reserve additional gas transit capacity through Ukraine or Poland and its gas export data showed a decline so that domestic demand in Russia was increasing.

Oil prices hit new multi-year highs, with Brent crude hitting $ 86 a barrel and WTI almost at $ 84, before slumping slightly for the day, both just a few dollars off their highs. Bloomberg reported that the global oil supply deficit had worsened after OPEC + cut production 15% deeper than expected in September, after a 16% deficit in August, according to delegates with knowledge of the topic. This reflected the inability of some members to increase production to agreed volumes due to lack of investment, exploration and other issues.

US economic data has been mixed, with an unexpected drop in industrial production of 1.3% m / m in September attributed to the impact of Hurricane Ida as supply shortages hit the auto sector. Meanwhile, confidence among home builders in the United States unexpectedly rose in October, despite rising materials prices and supply shortages.

Released yesterday, China’s economic activity data for September and the third quarter were mostly on the lower expectations side, with GDP growth of 4.9% year-on-year. The economy is grappling with a number of headwinds, including lockdown restrictions as well as its zero tolerance for COVID19 outbreaks, a weaker real estate sector and the energy crisis that has resulted in power cuts and shutdowns of ‘widespread factories.

US equity futures were weaker during the Asian trading session and the S & P500 opened some 0.5% weaker before returning to positive territory, now up 0.2%. Previously, the Euro Stoxx 600 index closed down 0.5%.

Global rates continue to climb as traders contemplate a tightening of monetary policy ahead. US rates are higher across the curve, led by the stomach. The 10-year rate hit a high of 1.62%, before taking off, to fall back to 1.58%, up 1bp for the day and slightly lower from the New Zealand close.

A number of global investment banks have advanced their calls for rate hikes in the UK, which now forecast a hike as early as next month after BoE Governor Bailey said over the weekend that the central bank “will have to act” to prevent higher inflation expectations from becoming more entrenched. . The market is anticipating more than 100bp hikes over the next year and the implied tightening is even more significant, given the fact that the BoE has said it will stop reinvesting bonds held under its program. QE once the bank rate hits 0.5%.

Higher UK rates, with the 2-year bond up some 13 basis points, have done little to support the pound as traders fear the BoE may overreact to a rising supply-induced inflation amid key headwinds for the UK economy. . The GBP is down slightly to 1.3740. Most major currencies show little movement against the USD, contained within plus or minus 0.15%. The NZD was the best performer, rising 0.3% to around 0.7090, a modest but explainable performance in the face of soaring interest rates, as we note below. The NZD crosses are all slightly higher for the day, although the relative strength of the Euro means the NZD / EUR is fairly stable around 0.61.

Yesterday New Zealand had another monster CPI impression, with annual headline inflation of 4.9% and Statistics NZ’s core measures average of 4.1%. The RBNZ sector factor model estimate for core inflation, which moves slowly, has low volatility and is very slow to adapt to new trends, showed a record 0.3% increase in l Annual increase to 2.7% alongside upward revisions to recent data.

Inflation data far exceeded market expectations, even though most of us were ready for a big result. Inflationary pressures were widespread and included a 4.5% rise in non-tradable goods inflation, strongly linked to excesses in the domestic real estate market, a market normally considered to be under the control of monetary policy. The data provided further confirmation that monetary policy was overly accommodative and that the market rightly incorporated more rate hikes into the curve.

The OIS market moved to assess an almost equal chance of a 50 basis point increase in OCR next month and incorporated a further rise of around 25 basis points by the start of the market. next year. An OCR of more than 2% is now priced for the end of next year. All of this translated into higher swap rates and a steeper curve, with the 2-year rate rising massive 28bp to 1.93% and the 10-year rate up 15bp to 2, 49%. The NZGB curve showed a similar flattening bias.

The NZD has reacted sparingly to the data, which is not surprising given that high inflation is a double-edged sword. In fact, our estimate of the short-term fair value of NZD has fallen slightly, with higher rates not keeping up with higher inflation (real rates matter more than nominal rates). The purchasing power parity theory also means that higher inflation means a lower estimate of long-term fair value.

The data has been a wake-up call to RBA watchers, with a significant rise in rates on the Australian curve as the market now experiences a 25 basis point rate hike by August 2022 and two rate hikes. here the end of next year. The market will be watching RBA trading closely this week, after the April 24 bond moved away from the policy target of 0.1%. The market rightly sees policy tightening well ahead of the RBA’s rhetoric, which has always been that the bank doesn’t see the terms for a rate hike until 2024. This direction seems more ludicrous by the day as other central banks are tilting in a more hawkish direction.

Finally, Prime Minister Ardern announced that Auckland will remain on Level 3 Alert for at least two more weeks and at the end of the week some vaccination targets will be provided that will offer a conditional path to easing restrictions. . The current lockdown, which is strict by global standards, is expected to last much longer than initially expected, leading to widespread downward revisions to fourth-quarter GDP estimates.

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