A stronger-than-expected US ISM Services index and speculations that the new UK PM, Liz Truss, will announce a significant fiscal stimulus later this week to shield people from increasing energy bills have caused another significant sell-off in global bonds overnight. The US 10-year rate has increased by 15 basis points, which has caused the USD to once again soar to a fresh 20-year high.
Overnight, the USD/JPY reached 143, while the NZD reached a fresh two-year low and is currently within striking distance of 0.60. With the reduced near-term chance of a UK recession and a view for higher-for-longer rates in the UK, the GBP has gained. The RBA increased its cash yesterday. With the UK yield curve undergoing a significant steepening movement overnight, that has unquestionably been the market’s view. The UK 2-year rate is 2bps lower, and lower near-term headline inflation is anticipated to lessen pressure on the BoE to raise interest rates by 75bps this month. In contrast, the UK 30-year rate is 21bps higher, reflecting the fiscal stimulus implied stronger medium-term growth and inflation outlook and the likelihood that bond issuance will be increased to pay for the program.
The BoE will not provide any assistance to the bond market because it is now selling off a sizable portion of its QE gilt holdings. Despite widespread USD gains, the GBP has done better over the last 24 hours, remaining steady for the day at a little around 1.15. With swap rates changing throughout the curve by less than 2bps, yesterday in the NZ rates market was rather calm. Market pricing for the peak has begun to stabilize at a rate of about 4.35%. The market has determined that the balance of risks around the OCR over the next 12 months is to the upside. The market doesn’t fully price the first rate drop until the end of 2024. Australian GDP data will be released today, and anticipate a Q2 growth rate of 0.7%, which is less than expected. The Bank of Canada is anticipated to hike its cash rate by 75 basis points (bps) tonight. The USD is still rising and overnight hit new 20-year highs. Given the remaining possibility of a recession in 2019, the US economy is still in a considerably healthier shape than those of Europe and China. The prolonged strength of the USD is also due to investors’ still cautious risk appetite.
