Global rates continue to climb

Global bond yields continued their recent rebound on Friday night, with the US 10-year yield narrowing to 3% for the first time in a month. Continued hawkish rhetoric from Fed officials appears to be preparing the market for a hawkish message from Chairman Powell in Jackson Hole on Friday night. Rising rates weighed on equity markets (S&P500 -1.3%) and supported a strong rise in the USD. The Euro ended the decline just above parity while the NZD underperformed, closing below 0.62.

There wasn’t much fresh news to boost markets on Friday, but investors are already looking forward to Fed Chairman Powell’s annual address at the Jackson Hole Symposium this Friday evening. Jackson Hole has always been a platform where the Fed Chairman foreshadowed future policy announcements and delivered moving market messages. Powell’s speech in Jackson Hole in 2021 focused heavily on the Fed’s view that inflation was likely to be “transient”, but the message this time is surely along the lines of “work is not done yet” to get inflation back on target.

Certainly, recent comments from Fed officials appear to be preparing the market for a hawkish message from Powell. After the deluge of Fed speakers earlier in the week talking about the need to bring the cash rate down to restrictive levels, Richmond Fed Chairman Barkin came out Friday night saying the Fed would do this. which was necessary to roll back inflation, even if it meant causing a recession. The market is delicately balanced ahead of Jackson Hole, with around a 50% chance of a 75bps upside for next month’s meeting and messages from Powell likely to influence the market’s direction towards a 50bps upside basis or a move of 75 basis points.

Global rates rose sharply again on Friday amid continued hawkish rhetoric from the Fed, the US 10-year rate rose another 9 basis points to 2.97%, now within reach of the bar. 3% for the first time in a month. Curve steepening was the order of the day, with the US 2yr 10yr yield curve steepening by 5bps although, at -26bps, it remains deeply inverted and consistent with the entry into recession of the US economy next year.

Spillovers were felt in other bond markets, with UK and German 10-year yields 10bps and 13bps higher respectively. Adding upward pressure on European tariffs, European gas prices rose another 8% on Friday, closing at a new record high, after Gazprom announced it would shut down the Nord Stream 1 gas pipeline for 3 days later this month for unscheduled maintenance work, fueling fears that Russia could further restrict supply. Soaring gas prices are exacerbating already extremely high inflation in the UK and Europe. Europe’s 10-year inflation swap is 40 basis points higher over the past month, now at 2.75%, as the market priced in rising inflation expectations.

Equity markets came under renewed pressure amid rising rates, with the S&P500 down 1.3% on Friday and the NASDAQ down 2%. After the crushing rally in equities over the past two months, driven by some emerging optimism that US inflation has peaked and the Fed may reduce its pace of rate hikes, but also heavy investor buying following trends, the market was arguably vulnerable to a correction. It was a similar story in Europe, with the EuroStoxx down 0.8% on Friday.

The USD continued to soar, BBDXY was up another 0.5% on Friday and more than 2% on the week, its biggest weekly gain since April 2020. The recent Fed rate outlook revision and Powell’s expectations will reinforce this hawkish message later. this week, alongside a pick-up in risk aversion, have contributed to the USD’s recent rebound.

USD strength is also a byproduct of EUR weakness, which is battling soaring gas prices and watching the barrel for a recession. The Euro weakened 0.5% on Friday, ending around 1.0040, with another charge below parity only a matter of time away. USD/JPY rose 0.8% amid a sharp hike in US Treasury rates, ending the week just below the 137 mark.

The NZD was the weakest of the G10 currencies on Friday, down 1.4% to around 0.6175. After rising 3.5% the previous week, the NZD came back to earth last week as risk appetite waned, falling 4.3%. The NZD/AUD cross ended the week below 0.90.

USD/CNH hit a two-year high on Friday above 6.84 on diverging monetary policy between the US and China. While all of the rhetoric from Fed officials has been uniformly hawkish, the PBOC is expected to follow up on last week’s surprise cut to the medium-term lending facility rate with 10 basis point cuts to prime rates. 1 year and 5 year loans today. China’s monetary policy is very different from that of most central banks in developed markets, given that CPI inflation remains low and the Chinese economy is struggling due to the slowdown in the real estate sector and of the uncertainty created by the constant threat of new blockages. The psychologically important level of 7.0 is now at around 2.5%.

New Zealand rates were higher and steeper again on Friday, taking their lead in offshore markets. The 10-year swap rate rose 7 basis points to 3.83%, while the 2-year rate rose 4 basis points to 3.995%. Market expectations for terminal OCR have been relatively stable at around 4% since the RBNZ MPS.

In an interview with the NZ Herald published on Friday, RBNZ Governor Orr suggested that the base case for RBNZ was to bring OCR to 4% by the end of the year, seen as “without ambiguity“above neutral, then to be”patient” leaving rates at this restrictive level for a while. Orr added that he thinks “we are close” to the end of the tightening cycle.

In weekend news, the government said certain sectors would be temporarily exempt from new median wage requirements for recruiting workers from overseas, in response to major labor shortages. The number of working holiday visas would also be doubled for 2022/23. The news is unlikely to be a game-changer for the labor market, given that many countries are currently competing for these same workers (the global labor market is very tight), but it could help labor supply. -work at the margin.

It’s a calmer week for economic data ahead, with the market focusing on Powell’s address in Jackson Hole on Friday night. Other central bankers in Jackson Hole include Bank of England Governor Bailey and ECB board member Schnabel. European PMIs are out tomorrow night, with economists expecting the composite index to fall further into contractionary territory, to 48.9, pointing to a recession in the region. There is only second tier data coming out of New Zealand, the main one being second quarter retail sales, where we expect a 2% rebound in volume over the quarter.

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