Today’s podcast

Overview: Taking a breather

• Markets take a breather after the big moves post US CPI
• US equities closed with modest gains, EU slightly lower
• UST curve extends flattening, 2y rate up another 3.5bps
• US Core PPI stronger than expected, keeping inflation concerns elevated
• JPY the outperformer in a quite night for FX
• Speculation of BoJ intervention the main cause
• Coming up: NZ GDP, AU Labour Force, Xi-Putin meeting, US Empire and Philly surveys plus retail sales and IP

Events round-up

• NZ: Current account balance (%/GDP), Q2: -7.7 vs. -7.5 exp.
• UK: CPI (y/y%), Aug: 9.9 vs. 10 exp.
• UK: Core CPI (y/y%), Aug: 6.3 vs. 6.2 exp.
• EC: Industrial production (m/m%), Jul: -2.3 vs. -1.1 exp.
• US: PPI ex food, energy (y/y%), Aug: 7.3 vs. 7 exp.

After recording hefty losses post the US CPI release on Tuesday, US equity markets closed with modest gains. The UST curve extended its post CPI flattening bias with the 2y rate up another 3.5bps (2s10s -38bps) while FX moves have been rather subdued barring JPY, up almost 1% amid speculation of imminent MoF/BoJ intervention. The euro showed little reaction to the European Commission proposal to deal with the energy crisis, now negotiations begin. AUD starts the new day at 0.6748.

After enduring a 4.32% decline on Tuesday, courtesy of a stronger than expected US core CPI reading, overnight the S&P 500 traded in and out positive territory overnight, before ending the day up 0.34%. The NASDAQ did a little bit better, closing the day up by 0.74%. Earlier in the session, European equities extended their post US CPI losses with the Stoxx Europe 600 down 0.9%.

Speaking about the ECB decision to lift its deposit rate by 0.75% last week, ECB Chief Economist Philip Lane said the big hike was appropriate while signalling future hikes are likely to get smaller. Meanwhile, sounding a bit more hawkish, ECB Villeroy said the ECB should focus on lifting borrowing costs to near 2% by year-end, before assessing whether further hikes are needed. That implies 125bps of hikes in the next two meetings, not too far where the market is at ( +135bps over the same period).

The consolidation theme was also evident in the rates markets although notably the UST curve extended its post CPI flattening bias . A stronger than expected US Core PPI reading has kept inflation concerns elevated, fuelling the move up in front end yields with the 2y rate up 3.5bps to 3.794% while 10y yields closed unchanged at 3.40%. US PPI decreased 0.1%mom in August taking the yoy reading 8.7% from a year ago, but the core PPI climbed by more than expected to 0.4% in August and up 7.3% from a year earlier. While gasoline prices eased in the month, producers faced higher costs for services and some goods such as construction equipment and beverages.

FX moves have been rather subdued barring JPY, up almost 1% amid speculation of imminent MoF/BoJ intervention . Yesterday in the aftermaths of the stronger than expected US core CPI print, USD/JPY traded to an intraday high of ¥144.95, then during our APAC trading session headline news hit the screen with the Nikkei reporting the BoJ had conducted a “rate check” with FX dealers. The rate check is an informal signalling by the BoJ to tell dealers it is preparing itself to intervene, in this case buy JPY. In recent weeks, Japanese officials have stepped up their verbal warnings amid undesirable JPY moves, the yen is the G10 underperformer down almost 20% year to date. Finance Minister Shunichi Suzuki said earlier in the session that Japan wouldn’t rule out any response if current trends continued and those options included stepping into markets, a warning he repeated later in the day.

History shows than once verbal warnings prove ineffective in arresting undesirable JPY moves, “rate checks” are the next move. In Japan, the Ministry of Finance (MoF) makes the intervention decision and the BoJ does the actual buying or selling. A verbal check doesn’t necessarily mean intervention is imminent, but certainly increases the risk. On the day, the rate check was enough to spook the market with USD/JPY falling almost 1% to ¥143.1855 currently, after falling to an overnight low of ¥142.5545.

That said, looking ahead, if there is any intervention, history suggests it is unlikely to have a longer lasting effect in terms of changing the weakening yen trend. There are clear fundamental reasons weighing on JPY today, Japan is suffering a negative terms of trade shock given its energy dependency and the BoJ ultra-easy policy is a big JPY headwind when other major central banks are embarking on an aggressive tightening path as they currently are. If the MoF/BOJ seriously want to arrest JPY decline, then a tweak to the BoJ’s yield-curve control policy would make more sense, officially not an option, but the pressure is building. Japan’s CPI will be released September 20, a 3% headline print is possible, 2 days ahead of the BoJ meeting and after a likely 75bps hike by the Fed, hours before the BoJ concludes its own meeting. Fed pricing expectations imply an 81bps hike next week and Fed funds rate of 4.20% by December.

Looking at other currencies, the euro is little changed hovering just below parity and showing little reaction to the European Commission’s (EC) proposal to deal with the ongoing energy crises ahead of winter. The EC plans to raise €140bn via a solidarity tax from energy companies enjoying outsize profits, support and regulatory changes are also envisaged to alleviate the liquidity squeeze in the energy sector, but notably the plan did not include an earlier idea to cap Russian gas prices. EU countries are divided over whether broader gas price caps would help or harm efforts to secure winter supplies. Now is all about negotiation with EU members with some diplomats suggesting a deal could be struck by September 30 , although most expect this to be a story of sometime in October.

GBP is up around 0.45% to 1.1539, a small recovery after plunging over two big figures the day before. Yesterday went Sydney was preparing to go home, the UK August headline CPI edge back below 10% (9.9%) with the pullback in vehicle fuel helpful. Elsewhere, food inflation was 10.8% after 10.4%. The more labour intensive services inflation came at 5.9% after 5.7%. Good inflation news, albeit still elevated and after yesterday’s solid labour market stats, the market is now pricing 68.7bps of BoE hike next week.

The AUD (+0.24%) and NZD (+0.14%) have edged a little bit higher over the past 24 hours but looking at the intraday chart is a consolidation theme with both antipodean currencies range trading overnight. NZ gets Q2 GDP figures this morning and Australia gets its August labour force report, see more below.

Lastly in a positive note, the Chinese city of Chengdu, with a population of ~21 million people, will start easing Covid restrictions for parts of the city today, as flagged over the weekend.  While the easing of restrictions in Chengdu and Shenzhen are positive, there remains the ever-present risk of future growth-damaging lockdowns with the authorities appearing set on keeping Covid contained until at least after the Party Congress next month

Coming up

• NZ Q2 GDP is today’s first cab off the rank with our BNZ colleagues anticipate NZ Q2 GDP to print at 1.4% (versus the RBNZ’s +1.8%). The componentry is looking volatile, which aggravates potential for (net) surprise.
• AU: Labour force report is also out this morning and it will be watched closely to see whether it supports a downshift in the pace of rate hikes to 25bp increments as Governor Lowe hinted at in his Anika Foundation speech. NAB sees employment bouncing back by 40k after last month’s sample-affected read of -40.9k (consensus +30k), and for the unemployment rate to fall a tenth to 3.3% (consensus 3.4%).
• China: The PBoC MLF 1y rate announcement is expected today and notwithstanding the current economic headwinds and subdued price pressures, the PBOC is anticipated to leave the 1y rate unchanged at 2.75% after a 10bps cut in August.
• Today presidents Xi and Putin meet face-to-face in Uzbekistan. We know their friendship has “no limits” and while trade between the two countries has increased since the start of the Russia-Ukraine war, Beijing has stopped short of sending military supplies or financial support. No change to China’s position is expected.
• Japan releases trade figures this morning and the Eurozone also publishes trades figures later today. ECB Centeno speaks
• The US has a busy calendar with the Empire manufacturing and Philadelphia Fed surveys due for release along with August retail sales, jobless claims and industrial production.Retail sales are seen easing to -0.1%mom in August after a flat outcome in July but the core reading (ex auto and gas) is expected to print a solid 0.5% monthly number after 0.7% in July.

 Market prices

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