Market Briefing: Kiwi in a Coal Mine Weighs on Market Sentiment
With stubbornly-hawkish noises coming from central banks in New Zealand and Australia—warning markets that officials could continue tightening policy into an economic slowdown—front-end yields are up this morning, and equity markets are set for a weaker open. The trade-weighted dollar climbed slightly overnight, but is holding near two-month lows, losing ground against most of its developed-market counterparts as yield differentials tilt in an unfavourable direction.
The Reserve Bank of New Zealand wrongfooted markets by raising rates by half a percentage point last night, saying “Inflation is still too high and persistent, and employment is beyond its maximum sustainable level”. The decision suggests the central bank, among the first to begin tightening policy in this cycle, is willing to push the economy into recession as it fights inflation - a sense of resolve that could foreshadow a more determined approach from monetary policymakers elsewhere.
After Tuesday’s pause, the Reserve Bank of Australia’s Governor Philip Lowe followed up by saying “The decision to hold rates steady this month does not imply that interest rate increases are over… Indeed, the board expects that some further tightening of monetary policy may well be needed to return inflation to target within a reasonable timeframe”.
Yesterday’s February job openings and labour turnover data painted a contradictory picture of underlying fundamentals. The number of available positions dropped to their lowest level in nearly two years, indicating that market conditions are beginning to ease. But layoffs also fell, and more people quit their jobs - suggesting that employers remain reluctant to reduce headcount, and workers are confident they will find new roles.
Manufactured goods orders were less confusing - and not in a good way. Factory orders dropped 0.7 percent after a 2.1 percent tumble in January, while orders for non-defence capital goods excluding aircraft—often seen as a proxy for business investment plans—fell 0.1 percent in February. Demand for tangible goods is unquestionably moderating.
Market-implied odds on a quarter point hike at the Federal Reserve’s May meeting have slipped below 50 percent, and traders now expect at least two rate cuts before the end of the year.
Today’s data agenda looks remarkably quiet. S&P will release its latest services purchasing manager survey at 9:45, the Institute for Supply Management will push its services report at 10:00, and the Energy Information Administration will publish its latest inventory numbers at 10:30. Analysts expect to see a 10.4 million-barrel drop in crude stockpiles, along with a 1.3 million-barrel slide in gasoline.
Oil prices seem to be losing momentum, with barrels of West Texas benchmark trading hands for $80, while the global Brent benchmark is going for less than $85. The Canadian dollar—highly correlated with oil prices for much of the period between 1995 and 2020—is struggling to gain altitude.
KARL SCHAMOTTA, CHIEF MARKET STRATEGIST
@KARL_SCHAMOTTA
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