Today’s podcast

Overview: Half the Truth

• • Treasury yields extend post-CPI fall-back, lifting equities and dampening the USD
  • Bank of Canada hikes 50bps, to start QT this month and (probably) go 50bps again in June
  • Fed’s Waller wants 50bp in May and possibly June and July too
  • JP Morgan kicks off bank earnings season with a ‘miss’ – four more banks report tonight
  • AUD/NZD hist post-August 2020 high of 1.0975 post the RBNZ’s 50bps hike
  • AU employment today, ECB tonight plus US retail sales, UoM consumer sentiment

“Well I will not lie to you, But I defiantly only gave you half the truth, I will not lie to you” – Kaiser Chiefs

25bps central bank rate hikes are suddenly so last year. Fifty is the new twenty five, as demonstrated by the RBNZ yesterday – the first G10 central bank to lift rates in the post-pandemic cycle and the first to do so by 50bps – quickly followed by the Bank of Canada. The Fed is almost bound to follow suit next month, and after another upside surprise in UK CPI yesterday, UK money markets are flirting with a 50-pointer from the Bank of England when it next meets on 5 May (currently about 20% priced)  Not NAB’s call, but we can well imagine that down here, markets will move closer to pricing a first RBA tightening – still expected for June – of 40bps. Money market pricing as of last night’s close put the odds of this at almost exactly 50%. Post the RBNZ, our BNZ colleagues haven’t shifted their view for the RBNZ going another 50bps in June.

The bigger market moving news in the last 24-hours has been the fall-back in US Treasury yields . Quite why is not clear, other than follow-through from the softer than expected core US CPI on Tuesday night (note that the 30-year yield, down over 10bps at one point, has backed up 5bps or so following a soft 30-yar auction). We noted here on Monday that the common thread across all asset market last week was the seemingly relentless rise in US Treasury yields – at both ends of the yield curve – and which were pressuring equities and lifting the USD dollar, a theme which continued into the early part of this week. Overnight, 10 year Treasuries are down to 2.695% versus an intra-week and cycle high of 2.83% on Tuesday, while 2s, which hit a high of 2.60% on Wednesday of last week, are currently down at 2.35%.  In turn, the USD is off its highs (DXY 99.9 from 100.5 earlier in the session) and US equities have finished with gains of 2% for the NASDAQ and 1.1% for the S&P500.  This follows a mixed night for European equities and where the Eurostoxx 50 benchmark ended little changed (-0.1%).

The fall bank in Treasury yields has come despite US Producer Price Indices coming in at double consensus market expectations, the ex-food and energy measure up 1% on the month against 0.5% expected, lifting the year-on-year rate to a new cycle high of 9.2% from 8.7% (and the headline to 11.2% from 10.3%). Earlier in the night, UK CPI printed at 1.1% on the month against 0.8% expected, for an annual rise of 7.0% up from 6.2% in February – hence the lift in UK money market pricing for future BoE meetings.

Blame for the fall-back in Treasury yields can’t be laid at the door of incoming Fed speak, Governor Christopher Waller, the latest to weigh in, telling CNBC “I prefer a front-loading approach. So a 50 basis-point hike in May would be consistent with that and possibly more in June and July…We want to get above neutral certainly by the latter half of this year and we need to get closer to neutral as soon as possible.”

The Bank of Canada’s 50bps rate hike was fully expected, in addition to which the BoC said it would commence ‘quantitative tightening’, or ‘QT’, later this month, with its bond portfolio expected to shrink around 40% over the next two years as it lets its bond holdings roll off.  The BoC said further tightening should be expected as the cash rate is lifted towards neutral, seen between 2-3%, with Governor Macklem saying it was prepared to move “forcefully ”.  The BoC is widely expected to follow up with another 50bps hike at its next meeting in early June (currently about 90% priced).

US equity market gains which, as said,  followed the fall-back in Treasury yields, got no help from the kick-off to the US earnings season, where JP Morgan’s Q1 EPS came in at $2.63 (vs $2.69 f/c) on revenue of $30.7bn (vs $30.86bn f/c). So a slight miss on both.  Provision for credit losses $1.46bn (said to be on inflation) were well above the estimated $465mn. There was a beat on investment banking revenue, but misses broadly elsewhere. After the results, JPM announced plans for a $30bn share buyback.

In FX, the 0.5% fall-back in ethe DXY USD index is driven by gains for GBP post CPI (0.9%) and CAD post the BOC (+0.6%) together with a 0.5% rise in EUR/USD in front of tonight’s ECB meeting where focus on whether they hint at its Asset Purchase Programme (QE) coming to a halt as early as Q2 not Q3 as previously indicated. Yesterday the NZD got no love out of the RBNZ whose 50-point hike was, in the RBNZ’s words, a front loading of hikes with no lift to the implied terminal rate in their OCR track. NZD losses post the RBNZ saw the AUD/NZD cross lift to as high as 1.0975, its best since August 2020.  AUD/USD dipped briefly below 0.74 overnight but is currently back to where it started Wednesday, near 0.7450.

Coming up

• In NZ we will doubtless be hearing from RBNZ official as is customary on the day after an OCR decision. NZ also has the BNZ/Business New Zealand manufacturing PMI (last at 53.6).
• Australian Employment data for March is the local highlight. We expect the unemployment rate to have fallen one-tenth to 3.9% on the back of a 50k employment gain. If realised, that would see the unemployment rate at its lowest level since 1974 and running well ahead of the RBA’s February SoMP forecasts. A sub-4% rate would also increase the RBA’s confidence in the outlook for a material lift in wages growth and allow the RBA to continue its shift to being forward looking, rather than waiting on the slow-moving and lagged WPI wages data.
• The Melbourne Institute’s April Consumer Inflation Expectations release will also be worth a look, last at 4.9% (a near 10-yr high).
• Offshore the focus is on the ECB meeting, one which sees no new economic forecasts. The central question given continued higher than forecast inflation is will the ECB use this meeting to explicitly signal an end to (APP) QE at the end of June? We think not as it can use the intervening period to assess further. However, we do anticipate a subtle shift in guidance that opens the possibility given a number of officials wanted a quicker end to QE as judged by the March meeting minutes.
• US data highlight is Retail Sales report is the highlight, where core Control Group sales are expected to be still soft at -0.2% m/m after Feb’s -1.2%. We also have the UoM Consumer Sentiment Survey for early March with the headline index expected to fall further to 58.8 from 59.4. Also important in the survey is the 5-10yr inflation expectation given the constant reference by Fed officials of ensuring inflation expectations remain anchored.
• Bank earnings will be flooding in  prior to the NYSE open – Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley

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