The RBNZ reduced its policy rate by 25 bps this morning to 3.5%

Markets

Early in the session yesterday, parts of global markets showed some relative calm compared the extreme volatility on Monday. Some (desperate?) investors hoped that US negotiations with some countries like Japan could herald the start of a more modest approach? Or was it simply a pause after wild repositioning? Whatever the reason, the ‘calm’ didn’t last long. Despite the headlines on (potential) negotiations with trading partners, reciprocal tariffs kicked in fully. The mark‐up for China tariffs to 104% also only illustrated that trade tensions intensified rather than eased. In the meantime, a $58bn US Treasury 3‐y note action drew only mediocre investors interest (lower bid cover 2.47 vs 2.7 at previous auction and tailing at 3.784% vs WI bid at 3.76%) flagging more underlying market stress. The immediate impact at the short end of the US yield curve remained modest as ST yields are still in the first place driven by expectations on monetary policy. However, it clearly was a warning sign for 10‐y and 30‐y auctions scheduled for today and tomorrow. In a further sharp steepening move, the US 2‐y yield still eased 3.7 bps, but the long end (30‐y) jumped 14.5 bps. Ever growing trade tensions and rising bond market stress also caused US equites to give up opening gains (S&P 500 ‐1.57%, Nasdaq ‐2.15%). Earlier in the session, German yields in a rather orderly move added between 5.8 bps (2‐y) and 0.6 bps (30‐y). Moves in the major dollar cross rates also remained rather modest compared to the swings in bonds and equities. Even so, the dollar gave up most earlier gains. DXY again closed just below the 103 handle. EUR/USD finished the session at 1.0958 (from 1.091). The yen again outperformed to close at USD/JPY 146.25.

This morning, signs of markets stress are building further. US Treasuries are hit hard with the 30‐y yield at some point jumping another 20 bps and hitting 5%. The US‐Treasury sell‐off also spilled over to Japanese bond markets. The 30‐y JGB yield at some point jumped 25 bps to 2.8%, triggering a crisis meeting of the MOF, the BOJ and FSA. It helped ease the sell‐off, at least temporary. The yuan (USD/CNY 7.35) extends its (engineered) decline against a broadly weaker dollar. EUR/USD firmly regained the 1.10 mark (1.105). USD/JPY is testing 145. Later today, a $39bn 10‐yr Treasury action could intensify the ‘sell US trade’. It again looks that we are heading for a risk‐off session, but with the dollar and US treasuries confronted the with loss of their safe haven virtues. Declining market liquidity and forced market repositioning annex other deleveraging (e.g. base trades trading the spread between futures and cash bonds) might intensify markets stress.

News and views

The Reserve Bank of New Zealand reduced its policy rate by 25 bps this morning to 3.5%. Growth and inflation evolved broadly as expected since the February monetary policy report with inflation near the mid‐point of the 1‐3% target band. That puts the RBNZ in the perfect spot to respond to developments. The recently announced increases in global trade barriers weaken the outlook for global economic activity. On balance, these developments create downside risks to the outlook for economic activity and inflation in New Zealand. Regarding inflation, the RBNZ points to trade diversion effects (lower import prices as trade gets redirected), lower global oil prices and weaker NZ growth (exports, but also subdued investment & spending). As the extent and effect of tariff policies become clearer, the MPC has scope to lower the policy rate further as appropriate. The kiwi dollar this morning tested support at NZD/USD 0.5470/0.5512 (2020 bottom & 2022 bottom). Losing this support would bring the kiwi dollar to its lowest level since early 2009.

The Reserve Bank of India cut its policy rate by 25 bps as well, from 6.25% to 6%, and switched its policy stance from neutral to accommodative, signaling more rate cuts ahead. Inflation is currently below the 4% target, supported by a sharp fall in food inflation, but new projections also show a decisive improvement in the inflation outlook. The benign outlook and moderate growth demand push the RBI into supporting growth going forward. Real GDP growth is now projected at 6.5% for FY 2025‐2026 with inflation projected at 4%. During this week’s market turmoil, USD/INR reversed a large part of the March correction lower with the pair bouncing back from 85 to 86.5 (vs YTD/all‐time high just below 88).

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