The New Zealand dollar fell and wholesale interest rates spiked higher after US jobs numbers sent shockwaves through the world’s financial markets.
Europe’s Stoxx 600 sharemarket index closed down 2.3 per cent, its biggest one-day drop since March, as the yield on the benchmark two-year US Treasury bond reached its highest level since 2007.
The moves came after the US gained 497,000 private sector jobs last month — about double economists’ expectations.
The two-year US Treasury hit 5.12 per cent, while the benchmark 10-year broke through 4 per cent to hit 4.08 per cent.
By the late afternoon, the New Zealand dollar was licking its wounds at US61.68c, down from US62.2c just before the US release, but off its low of US61.34c.
Key NZ two-year swap rates – which have an influence on mortgage rates – were at 5.72 per cent from 5.52 per cent earlier in the week.
The Reserve Bank is expected to keep its official cash rate (OCR) unchanged at its rate review on Wednesday, but the US jobs data has sown the seeds of doubt as to whether 5.5 per cent will represent the peak, as has generally been accepted.
Westpac senior markets strategist Imre Speizer said the New Zealand swap rate was back at 2008 levels following the US data.
“It was incredibly strong data,” he said. “The US ... is not showing any signs of weakness, which means that the US Federal Reserve has more work to do.
“Long-term interest rates have got to do more because the US economy is not about to go into recession,” he said.
The Fed has raised its federal funds rate more by than 5 percentage points since early 2022.
“The logic is that the world’s economic cycles are reasonably well synchronised now, and monetary policy is moving the same way,” he said.
“The theme has been that central banks have been at, or near, the end game.
“The question now is, is there more to go? And if so, by how much,” Speizer said.
“Every major market is asking the same question, so when the US market leads the way, the other markets take notice.”
Local markets had previously largely been on board with the Reserve Bank’s signalling that the current official cash rate of 5.5 would be the peak.
ANZ strategist David Croy said it looked like major central banks were having a re-think about where official rates go from here.
“We have also seen the Bank of England talking tough, and the market is pricing in a 6.5 per cent cash rate.”
The Bank of England’s rate stands at 5.0 per cent, having been raised by half a point last month.
After today’s data, the markets are pricing in at least two more rate rises from the US Federal Reserve.
“We have gone from a situation of central banks being on hold – pausing – to the market thinking about what the resumptions of rate hikes will start to look like.
“The global market has got the local market a bit nervous,” Speizer said.
While no one expects the Reserve Bank to move its rate at the review on Wednesday, market pricing is suggesting 5.68 per cent by November.
Today’s moves came at a busy time for the local market.
The Treasury this week announced that an additional $5 billion of the nominal April 14, 2033 New Zealand Government Bond has been issued through a syndicated offer.
Croy said it was the second-biggest syndicated offer seen in the market.
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.