US equities reached a record high, US Treasury rates slipped below 2% and the USD is under further downward pressure, as the afterglow continues following the Fed’s opening of the door to an easing cycle; NZD’s recovery this week continues

US equities reached a record high, US Treasury rates slipped below 2% and the USD is under further downward pressure, as the afterglow continues following the Fed’s opening of the door to an easing cycle.

US equities opened at a record high, fuelled by prospects of the Fed soon kicking off an easing cycle, with a rate cut at the end of July now fully priced.  Indeed, some 33bps of easing is priced in for that meeting, suggesting a growing risk that the Fed will kick off the cycle with a 50bps cut, after Chair Powell push back on such a move at his press conference yesterday. The 10-year Treasury rate slipped below the 2% mark in early Asian trading yesterday and has hovered around that mark since, after reaching a low of 1.97%.

The S&P500 is currently up 0.8%, led by the energy sector, with oil prices up 4-5% after Iran shot down a US drone spying in the Strait of Hormuz.  Stock peeled off their highs after Trump tweeted “Iran made a very big mistake!” and later, when asked if the US would strike Iran after the drone shooting, Trump said that the world will find out soon enough. As we go to print, stocks are on the charge again.

The USD fell after the dovish Fed statement yesterday and has continued to trend lower. It is weaker across the board and down around 0.6% for the day on the key USD indices we follow. NOK leads the way, after Norway’s central bank continues to go against the grain of other central banks, by hiking rates again and saying that it would “most likely” do so again. Higher oil prices have added to its gains, with NOK about 2% stronger over the last couple of days.

The NZD’s recovery this week continues, getting close to the 0.66 mark, supported by the dovish Fed and GDP data that didn’t disappoint. NZ Q1 GDP rose by 0.6% q/q, in line with market expectations, with upward revisions driving the slightly better than expected annual growth of 2.5%. That the economy held up okay came as a relief, with obviously some in the market positioned for a disappointing result. In the rates market, global forces continue to predominate, with NZ rates down 6-8bps in the swaps and government bond market to fresh record lows.  The 2 and 10-year swap rate closed at 1.30% and 1.73% respectively, with NZ’s 10-year government rate closing at 1.51%. The market thinks that the RBNZ won’t cut again as soon as next week, but a 25bps cut at the August MPS is almost fully priced, while the terminal OCR is down to 0.985% by early next year, suggesting that more than two full rate cuts from here are now priced.

Helping fuel the NZ rates market is the overtly dovish commentary coming from the RBA.  Governor Lowe commented in a speech that “the most recent data…do not suggest we are making any inroads into the economy’s spare capacity…it is not unrealistic to expect a further reduction in the cash rate”.  This sets the scene for a follow-up rate cut at the RBA’s early-July meeting.  Australian bonds continue to rally, with the 3-year future now recording an implied yield of just 0.88%.  Stronger NZD GDP data and the RBA’s comments supported a rise in NZD/AUD to as high as 0.9540, and it currently sits at 0.9520, with the AUD sustaining a move up through 0.69.

Of the majors, GBP has made the smallest gains against the USD since this time yesterday, rising to 1.2700. The Bank of England offered a downbeat assessment on the economy, keeping rates steady and noting rising risks to growth, including trade tensions and the risk of a no-deal Brexit. Guidance for future rate hikes remains contingent on a smooth Brexit path while the minutes acknowledge that financial markets are pricing in an alternative scenario. The market prices in an better than even chance of a rate cut from early next year, while the UK 10-year rate fell by 6bps to 0.805%.

Boris Johnson, the hot favourite, will face off Jeremy Hunt in the battle to become the next UK PM, with the outcome determined by a vote of Conservative Party members, with the winner announced in late July. Both candidates are (now) pro-Brexit and favour a no-deal Brexit over no Brexit at all.

Yesterday, the BoJ kept its policy settings and forward guidance unchanged. Governor Kuroda said that the Bank wouldn’t hesitate to offer more easing if momentum is lost but was happy to take a wait-and-see approach before offering more stimulus – no doubt realising that the BoJ’s toolbox is near-empty. Indeed, with Japan’s 10-year rate close to the bottom of the permissible trading range of minus 0.2%, there is speculation that the BoJ will actually soon have to trim bond purchases. The soft USD backdrop sees USD/JPY down to 107.30.

In other news, the South China Morning Post reported that US and Chinese trade negotiators are scrambling to put a plan together, as they look to ease trade tensions ahead of President Xi and Trump’s meeting at the G20 next week.  Chinese Commerce Ministry spokesman Gao said that “We believe the two sides will definitely find a solution through dialogue on an equal footing and looking after each other’s concerns.” The outcome of Xi and Trump’s meeting at the end of next week will be crucial for the market, spanning equities, bonds and currencies.  A congenial meeting would see risk assets and the NZD make further gains, while we’ll be looking at fresh lows if new tariffs are imposed soon after.

Tonight sees the release of PMI data across the euro-area, which will be keenly watched considering how low Germany’s manufacturing PMI has fallen recently.  Ahead of that Japan CPI data are released this afternoon.