It’s been a slow start to the week, with little news to digest. A positive mood hangs over equity markets and the US 10-year Treasury rate tested a fresh high, while currency movements have been modest.
European equities rose by over 1%, playing catch-up to the late-Friday rally on Wall Street. US equities are higher again, with the S&P500 up around 1½% and now up 5% from the intraday low on Friday. A positive close would see the first back-to-back gain in more than two weeks, perhaps a sign that the meltdown episode has now passed.
The US 10-year rate broke through 2.89% last night, but then fell to as low as 2.83%. It currently sits at 2.86%, up 1 bp for the day.
President Trump released his 2019 Budget, but it is customary for Congress to ignore the plan from the White House. The market still seems nervous about the size of projected deficits, following the tax reform policy and rise in spending that was required to get bi-partisan support for a one-year suspension of the debt ceiling. At the end of last week Moody’s Investor Services said that the US Aaa credit rating is likely to face downward pressure in coming years due to the country’s swelling debt load. Easier fiscal policy could well sway the Fed into upping its rate projections this year from three to four rate hikes at its March update. In the meantime, all eyes will be on Wednesday night’s US CPI report.
The local rates market showed a bias for higher rates yesterday, reflecting global pressures, with 10-year government and swap rates up 4bps to 2.99% and 3.31% respectively. The market ignored the dovish view proffered by RBNZ Assistant Governor McDermott in a local newspaper. While we weren’t privy to the full interview, the line published was that the RBNZ could easily cut rates if the economy ended up weaker than expected, with McDermott coming across highly defensive against some calls that the Bank’s forecasts were too optimistic. The market’s view is that there is a high hurdle rate for any further rate cuts this cycle and didn’t react to the published article. The 2-year swap rate ended the day 1bp higher at 2.16%.
It should be another quiet local trading session today. Tonight sees the release of UK CPI data, which will get more attention following the BoE’s more hawkish policy guidance last week. The Fed’s Mester, a voter this year with a hawkish bent, offers her view on the monetary policy and economic outlook.
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