Markets acting on rising global price pressures

Overnight Headlines

*US stocks gained for a fourth day on a tech-driven rally

*USD failed above 94 and has broken down this morning

*US Democrats battle over climate change plans

*Two Chinese property developers make coupon payments

US equities finished mostly higher with growth leading the way. Tech and communication services were the outperformers while utilities and healthcare were the laggards. Nasdaq closed 0.8% higher, S&P500 0.3% higher and the Dow finished down 0.1%. Asian markets are following Wall Street’s positive mood although US futures are flat at present.

USD has sold off this morning after failing to move decisively higher above 94 on the DXY. US industrial production fell by the most in seven months in September. EUR was generally the biggest outperformer, which saw EUR/USD break higher towards resistance at 1.1663. GBP has pushed up to last week’s highs at 1.3773 and is nearing trendline resistance around 1.38.

Market Thoughts – Violent front-end bond market selloff

We don’t want to get to much into bond market moves, but price action yesterday might be worth taking note. The BoE Governor Bailey lit the rate hiking fuse again over the weekend, saying that the bank “will have to act” to keep a lid on inflationary pressures. He did add some caveats, but he failed to conclusively push back on already aggressive pricing in money markets. This sparked another strong selloff in short-dated government bonds. Two-year yields hit their highest level in nearly three years, with a 15bp rate hike fully priced for the November MPC meeting.

The BoE is now the frontrunner among major central banks in the battle against rising prices. (115bps of rate hikes for the next 12 month!) Hawkish positioning was also seen in across the pond with the US now some 50bps of rate hikes in for next year. And even EU markets have around 20bps of hikes by the ECB.

Has this pricing now gone too far? The ECB has not veered from “team transitory” and ending bond buying, let alone starting on a tightening cycle. Yet, the move this morning in EUR and GBP are clear moves to the upside. Yesterday’s bond move also tells us that hikes will be short and sharp to deal with supply side shocks.

Chart of the Day – Rampant kiwi flies against the yen

While fixed income markets were lively yesterday, FX was relatively subdued. But things have changed this morning with the dollar under pressure and risk buoyant. We had New Zealand inflation out Monday which showed the fastest rise in over 10 years. It moved up to 4.9% from 3.3% in the previous quarter. There has also been no let-up in commodity prices over the last week.

This has seen the chances of a 50bps rate hike at the next RBNZ meeting rise to the flip of a coin. This stands in stark contrast to the BoJ who are still in yield curve control mode amid general deflationary forces.

NZD/JPY is enjoying its ninth day of gains having moved from around 77 just a couple of weeks ago to 81.50 today and near four-year highs. Next major resistance sits just below 84.00. We are overbought on the numerous indicators on the daily though not on longer-term charts. Expect to see dip buying as seasonals also favour this pair. Initial support is at the previous ytd top at 80.18.