Markets
US Treasuries sold off for a third straight session yesterday with eco data strengthening the case for a hawkish tone at next week’s FOMC meeting. Risks are significantly tilting to a first rate cut in September at the earliest. February US producer price inflation accelerated much more than forecast (0.6% M/M for headline & 0.3% M/M for core) with Y/Y-figures establishing a bottoming out pattern. Weekly jobless claims came in at another extremely low 209k. Slightly slower February retail sales growth on the top level (+0.6% M/M vs 0.8% forecast) and for the control group (flat vs +0.4%) suggest fading momentum in Joe Sixpack’s expenses, but were clearly not the market focus. US Treasury yields added 5.9 bps (2-yr) to 10 bps (10-yr) on a daily basis. The US 2-yr yield closed at 4.69% with the YTD high standing at 4.74%. The US 10-yr yield closed at 4.29% compared to YTD high resistance at 4.35%. German yields followed the move higher to a lesser extent with Bund yields adding 2.8 bps (2-yr) to 5.9 bps (5-yr). The dollar for the first time really profited from the interest rate support. EUR/USD closed below minor first support (1.0902; neckline short term double top formation). The pair is now attacking 1.0872 which is 38% retracement on the comeback since mid-February. Losing that level in this week’s close would be very significant and suggest more downward potential to the 1.08 and 1.07 big figures. Two other factors backed the greenback yesterday. First the (slight) risk-off market sentiment. Main European and US bourses lost up to 0.5% yesterday. Second, oil prices rallied significantly over the past two days. Brent crude surged from $82/b to almost $86/b, the highest level since the end of October. The International Energy Agency yesterday switched sides, forecasting a likely oil deficit for 2024 instead of a surplus previously. Stronger demand, limited passage through Panama & Suez canals and the risk of prolonged OPEC+ production cuts all came in the mix.
Today’s eco calendar contains the outcome of Japan’s biggest labour union’s (Rengo) wage negotiations. Kyodo reports that they won average pay hikes of over 5% for the coming fiscal year (3.8% last year) which cements the case for a first BoJ rate hike since 2007 when they meet next week. It could add to selling pressure on global core bonds with JPY in a first reaction profiting (USD/JPY 148). The US eco calendar contains import/export prices, production figures and March confidence data (Empire Manufacturing survey and University of Michigan consumer confidence). We expect them to prolong the current market trends of underperforming US Treasuries and a stronger greenback.
News & Views
New Zealand Finance Minister Willis warned for a substantial deterioration in the economic outlook for the country. “The numbers haven’t been finalized, but I know enough to say they won’t make happy reading”. The New Zealand Treasury in December projected growth of 1.5% for this and next fiscal year. New Zealand will publish Q4 2023 growth figures next week. After a contraction of -0.3% Q/Q in Q3, growth is expected to have hardly rebounded in Q4 (0.1% Q/Q). The RBNZ in its end-February monetary policy report forecasted Q4 growth at 0.0%. Materially lower expected growth also eases the case for the RBNZ to maintain current tight monetary policy throughout this year. The market discounts a first 25 bps rate cut at the October meeting and even sees a 80% chance of a first step already at the August meeting. The kiwi dollar is ceding further ground this morning after yesterday’s USD driven loss. NZD/USD currently trades near 0.61.
Chinese housing data published this morning indicate that recent measures to support the property market still have to filter through to the real economy. In 57 of 70 cities observed, new home prices declined compared to last year. Prices on average fell 0.36% M/M. Prices of existing home were even lower in all 70 cities compared to last year with a further monthly decline in February of 0.62% M/M. Despite ongoing pressures in the real estate market and the broader economy, the People’s Bank of China today left its 1-year loan rate unchanged at 2.50%. Amongst others, the PBOC probably remains cautious on further monetary easy to prevent further downside pressure on the yuan. USD/CNY is holding a tight range close to, but just below 7.20 (currently 7.196).
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