Yesterday’s RBA U-turn as it raised the policy rate by a bigger than expected 25 bpn inaugural rate hike, set the tone for global bond markets. European yields continued their journey north with the Euro 2-y swap and the German 10-y yield touching the psychological barrier of 1.0%. The upward momentum eased during the day. Even so, European markets continue to push the ECB for a similar U-turn as taken by the RBA and the Riksbank recently. The German yield curve flattened with the 2-y rising 3.3 bp while the 30-y lost 5.2%.
Later in the evening, ECB’s Schnabel in an interview with Handelsblatt newspaper spoke more hawkish than her colleague de Guindos. She said ‘It’s not enough to talk now, we have to act’. She sees a July rate hike as possible as the ECB must prevent high inflation from taking hold of expectations.
US bond markets held a similar intra-day pattern as investors were counting down to the Fed policy decision. The US 2-y yield rose 5.1 bps. The 30-y declined 2.4 bps. So markets apparently don’t expect Fed Powell to backtrack on his hawkish tone. Record high JOLTS job openings also provided further ‘anecdotical’ evidence the labour market still allows the Fed to continue its frontloading approach.
Equity investors were cautious to put strong directional bets ahead of the FOMC decision. Major US equity indices gained between 0.2% and 0.5%. The Euro Stoxx 50 slightly outperformed (0.77%).
The dollar held strong within reach of recent peak levels. However, the DXY index (close 103.46) failed to clear last week low while EUR/USD still avoided a break below the 1.0472/1.05 support area. However, the picture remains fragile.Today, eco data including the US ADP labour market report, the services ISM or EMU retail sales most likely will be overshadowed by this evening’s Fed policy decision. Anything below a 50 bps rate hike would be a big surprise and more similar steps are expected to follow at least in the next 2-3 meetings. The FOMC will also provide the details of its balance sheet roll-off that will start in the very near future and soon reach a cruise speed of a $95bn monthly reduction.
The market currently sees a peak in the Fed rate hike cycle near 3.25% in H1 2023. So quite some tightening is already discounted. That said, with inflation at current high levels and a red hot labour market, we don’t see any reason for Powell to already rein in market expectations on policy tightening.
So we expect US short-term yields to stay at current elevated levels. LT yields still might feel support from a further rise in real yields due to QT. In this context, it’s also too early to anticipate a USD correction, especially against the likes of the euro and the yen where CB’s still have to bring clarity on their commitment to address inflationary risks.
The New Zealand Q1 labour market report showed a stable seasonally adjust unemployment rate at 3.2%, one of the lowest on record since the series began in 1986. The number of employed people rose marginally by 2k to 2 826 000, but the number of actual hours worked fell. More people stayed away from work due to sickness with the Covid-pandemic to blame. The labour force participation rate declined from 71.1% in Q4 2021 to 70.9%. Annual wage inflation measured by the labour cost index rose to 3% in Q1 2022, up from 2.6%, the highest level since Q1 2009. The kiwi dollar didn’t profit from the decent data which strengthen the case for a continuation of the RBNZ’s tightening cycle. NZD/USD is broadly stable around 0.6430. The pair last week lost key support around 0.6530 (previous YTD low) and 0.6467 (50% retracement on 2020/2021 upleg). In a separate report (semi-annual financial stability report), the RBNZ warned for a potentially sharp correction in house prices with broad economic implications because of rising interest rates and higher living costs.
The March JOLTS (Job Openings and Labour Turnover Summary) report showed the number of US job openings at a series high of 11.55 million compared to 11.35 million at the last business day of February. The job openings rate (number of job openings divided by employment plus job openings) was little changed at 7.1% (equal to December 2021 high). The number of new hires cooled slightly to 6.7mn (hires rate at 4.5%) while the number of workers quit their jobs rose to a record 4.5mn (quits rate 3%). The data continue to point to an extremely tight US labour market, allowing the Fed to embark on an aggressive tightening cycle..