Todays podcast

Overview Serious

• UK inflation surprises higher at 10.1% y/y
• Bonds sell off, led by gilts with UK 2yr +24bp to 2.38%
• Yields higher, dollar stronger (+0.2% on DXY), and equities lower (S&P500 -0.7%)
• FOMC minutes seen less hawkish than expected, USD and US 2yr yield pare gains
• RBNZ +50bp to 3.0% as expected
• Coming up: AU Employment, RBNZ’s Orr

Think it’s serious, gone from bad to worse, And I’m in trouble – Gwen Stefani

A surprise higher in UK inflation has seen gilts sell off sharply and global bond yields more broadly move higher. Equities are generally a lower, the S&P500 -0.7%, amid the hit to risk sentiment while the USD is stronger against most of the G10 currencies. US short end yields and the USD pared some of their earlier increases following the FOMC minutes. The RBNZ delivered a 50bps OCR increase yesterday, as expected, and nudged up its forecast OCR track to show a peak of 4.1%, though there was little reaction in NZ rated of the NZD.

UK inflation came in hotter than expected at 10.1% y/y against 9.8% expected, with more to come in October when energy bills are set to rise by 75%. Food prices rose 2.3% in July and 12.3% y/y, with higher food costs also reflected in higher takeaway prices. The data showed breadth of price increases, with the core read excluding energy, food, alcohol and tobacco also higher than expected at 6.2% y/y vs 5.9%.

Market pricing for the BoE now sees Bank Rate above 3.7% by March next year and peaking at 3.74 in May, 28bp higher than yesterday. 2yr gilt yields were 24bp higher at 2.38%, outpacing a 16bp rise in the 10yr. The upside surprise refocussing the inflation challenge after some reprieve in last week’s downside surprise on US CPI, bond yields were higher globally. The US 10yr was 8bp higher to 2.89% and the German 10yr 11bp higher at 1.08%. The futures-implied Australian 10yr yield was up 12bp.

The July FOMC Minutes saw short end yields pare gains in the US. Overall, the market response suggested they were interpreted as a little less hawkish than expected. The 2yr yield was about 5bp lower at 3.28% after the minutes but still 2bp higher over the day. Helping that interpretation was a repeat of the line that “it likely would become appropriate at some point to slow the pace of policy rate increases. ” A comment that many participants remarked that given long and variable lags, “there was also a risk that the committee could tighten the stance of policy by more than necessary” also aided. It should be noted though that came immediately following a comment that participants judged ‘a significant risk’ that inflation could become entrenched “if the public began to question the Committee’s resolve to adjust the stance of policy sufficiently” and elsewhere in the document it was noted that “moving to a restrictive stance of the policy rate in the near term would also be appropriate from a risk-management perspective.” The minutes also “ stressed that moving to an appropriately restrictive stance of policy was essential” and, “Some participants indicated that, once the policy rate had reached a sufficiently restrictive level, it likely would be appropriate to maintain that level for some time.”

Equities were generally softer with the S&P500 0.7% lower. Earnings from Target showed a fall in profits as the company said it saw customers cut spending on discretionary items even as revenue rose, with the Target CEO saying “we continue to see a very healthy US consumer. ”, while earnings from Lowe’s beat expectations following strong reports from Walmart and Home Depot on Tuesday. The S&P was still up 17% from its recent mid-June low. The Nasdaq was 1.2% lower while European bourses were red across the board, the Euro Stoxx 50 down 1.3%. Earlier, Asian equities were generally higher.

The USD was generally stronger against the backdrop of higher rates , up 0.2% on the DXY after paring earlier gains of 0.4% after the FOMC minutes. With yields higher, the USD was 0.6% higher against the yen at 135.09, but tracked broadly sideways against the euro, which was 0.1% stronger at 1.0179. The AUD and NZD were underperformers on the day, down 1.2 and 1.1%. The aussie is now back below 70c at 0.6935. The move in the AUD came alongside the stronger USD following the UK inflation print after only a small and short-lived reaction to the softer-than-expected wages data headline (more below).

In other data flow, US Retail Sales were unchanged, near consensus for a 0.1% rise, but the detail showed a stronger release than the headline suggests and showed a consumer in still good health despite recession fears. Sales ex autos rose 0.4% (-0.1% expected) and the control group 0.8% (0.6% expected). In addition, there was a 0.9% upward revision to the control group. Falling gas prices in the month contributed to a 1.8% fall in gas station sales, with the result suggesting consumers much of this benefit was directed into other spending.

On the RBNZ, the Bank raised its OCR by 50bp to 3.0%, as universally expected . The RBNZ also slightly lifted its forecast OCR track to project a peak in the cash rate of 4.1% next year (previously 3.95%), and signalling a high chance of 50bps hikes at each of the next two meetings in October and November. The tone of the statement was hawkish, as expected, and emphasised that core inflation was still much too high and the labour market too tight. After an initial spike higher in the hour or two after the MPS was released, the NZD and NZ rates both settled back down close to where they were before the statement.

In Australia, wages data for the 3 months to May again disappointed most forecasters, rising 0.7% q/q and 2.6% y/y against 0.8% q/q expected . Though the result was in line with the RBA August SoMP (and NAB) forecast. The detail reveal a continued acceleration in wages growth alongside the earlier tightening in the labour market and show wages growth already tracking above pre-pandemic levels ahead of further acceleration in prospect. One key indicator, the average private sector wage increase for those that saw a wage change, rose to 3.8%, its highest since 2012. All in all still likely consistent with the RBA moving by 50bp in September. Market pricing has around 42bp priced.

Coming Up

• AU labour market data for July is seen largely confirming the strength seen in the blockbuster June print even as employment growth slows. The unemployment rate is seen remaining at 3.5% on an employment gain of 25k (NAB 3.5/20).
• The US gets initial jobless claims and the Philadelphia Fed business outlook, which after the plummet in the Empire Manufacturing Index earlier this week could see more than usual attention.
• RBNZ Governor Orr attends the Finance and Expenditure Select Committee this morning and Orr and his deputies usually engage in media interviews in the days that follow an MPS

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