Markets
It was groundhog day on financial markets yesterday. Core bond yields – as on Monday – moved away from support levels up until the early US data release. On Monday, a disappointing manufacturing ISM started a core bond new short squeeze. Yesterday, JOLTS job openings were responsible for the turnaround. On both occasions, the market reaction is especially telling about general sentiment these days. US Treasuries rallied with the front end of the curve outperforming. US yields closed 13.8 bps (2-yr) to 3.3 bps (30-yr) lower with intraday swings even larger. Daily swings on the German yield curve varied between -7.4 bps (2-yr) and +3.1 bps (30-yr). US yields are now holding just above the March sell-off lows across the curve (technical support!). The dollar was already in a soft spot going into the data with EUR/USD taking out final resistance ahead of the 1.1033 YTD top at 1.0930 after JOLTS. The pair closed slightly above 1.0950. The trade-weighted greenback (DXY) closed below the March low (101.46) with the YTD low at 100.82 becoming the next reference. Sterling enjoyed a stellar start to the trading day with EUR/GBP dropping half a big figure to 0.8730 on… actually nothing, before pairing losses during US dealings in a copy-paste of the EUR/USD-move. Turning to the data, job openings unexpectedly fell from around 10.5 million to 9.93 million in February. It was the first <10mn reading since May 2021, coming off a 12mn peak in March 2022. However, this number compares to pre-pandemic levels of around 7 million and still outnumbers the 5.9 million unemployed Americans by a very wide margin. So instead of a cooling of the labour market, we’re more talking about an easing of tightness of the labour market. The vacancy-to-unemployment ratio fell to 1.7, the lowest level since November 2021 and compared to a December 2022 peak of 2, but very much above the pre-pandemic 1.2. The quits rate increased from 2.5% to 2.6% (vs 3% peak in April 2022) with the layoff rate down to 1% from 1.1%. Both thus point to more underlying strength compared to the headline number.
The set-up for today risks triggering yet another repeat of what we’ve seen so far with the onus on US March ADP employment change and the non-manufacturing ISM. Markets have shown an asymmetric reaction function since the SVB collapse, with outsized moves on disappointing economic numbers. The strength of this week’s bond rally and the proximity of technical support levels might have a dampening impact in case of weaker figures though. EUR/USD could aim for a first test of 1.1033.
News Headlines
The Reserve Bank of New Zealand surprisingly raised its policy rate by 50 bps from 4.75% to 5.25%. It was the eleventh consecutive rate hike since the start of the hiking cycle in October 2021. The RBNZ kept its analysis that such a rate hike is needed to return inflation to the 1-3% target range over the medium term. Inflation is currently still seen as too high and persistent while employment is beyond its maximal sustainable level. Q4 growth was softer than expected and capacity constrains in the economy are easing. Demand continues to significantly outpace supply though, maintaining pressure on inflation. Even as the economy is expected to slow in 2023, activity remains supported by rebuilding efforts after recent whether events, with resources demand expected to add to inflation more than previously expected. The Committee concludes that keeping the current level of lending rates for households and businesses is necessary to achieve the inflation target, along with a rise in deposit rates. The 2-y government yield jumped 12 bps to 4.7%. Markets still see a 50%+ chance for a final hike in Summer. That was the RBNZ’s own base scenario back in February. The kiwi dollar initially jumped 1%, but eased back to NZD/USD 0.635.
According to a quarterly survey of the British Chambers of Commerce, 52% of UK businesses questioned see sales growing over the next 12 months. However, positive expectations started from a low base as only 34% reported higher sales in Q1 2023. 24% saw a decline in sales. The BCC head of Research said the survey indicated ‘an improvement in business sentiment as political turmoil and inflationary pressures show some signs of easing’. With respect to inflation, BCC indicated that businesses’ concerns on inflation eased for the first time in two years. The number of companies planning to raise prices was said to have dropped to 55% from 60%.
