Markets have been exceptionally quiet overnight, with the US cash market closed for Independence Day and no major data released. The NZD has reversed some of its outperformance from yesterday and has slipped back below 0.67.
There is not too much to say about overnight market moves, with no fresh developments or data and the US market closed. European equities have made small gains and S&P futures are fractionally higher. Core European bond yields continued to drift lower, with the 10 year German bund trading below -0.4%, the same level as the ECB’s deposit rate. The European 5 year swap in 5 years’ time (the so-called 5 year 5 year forward) fell to a fresh all-time low, and is consistent with the market pricing an ECB policy rate beyond the current cycle of only 0.25%. Market pricing is very much consistent with a “Japanification” of Europe – i.e. near-permanent negative or zero interest rates amid high savings rates and low inflation. Amid the search for yield, the yield on the emerging market local currency bond index reached an all-time low of 4.17% overnight.
Comments from ECB policymaker, and Finnish central bank Governor, Olli Rehn did nothing to temper market expectations for further monetary stimulus from the ECB in the coming months. Rehn said the slowdown in growth in the Euro zone could no longer be considered a “temporary dip” and he batted away suggestions that the ECB was running out of policy ammunition. In terms of rate cuts, Rehn said the ECB would consider measures (i.e. tiering) to mitigate the side-effects on the financial system and added that there was a “certain degree of flexibility” around the ECB’s restrictions on QE holdings (currently, the ECB limits itself to buying only up to 33% of any country’s bonds, with several countries very close to that limit).
Currency market moves have been similarly subdued. The NZD has been the weakest currency over the past 24 hours, partially reversing the moves from Wednesday night. The NZD is 0.3% lower to 0.6685, having traded as high as 0.6720 yesterday afternoon. The AUD is also slightly lower over the past 24 hours, down 0.1% to 0.7020. There was little reaction to yesterday’s Australian data which included a weaker than expected retail sales release and a fall in job vacancies that our NAB colleagues see as pointing to a slowdown in future employment growth. The USD was unchanged in index terms.
The focus tonight is on the monthly US non-farm payrolls release. Liquidity will be lower than usual with a large number of US market participants likely to take the day off after Independence Day. The market consensus is for jobs growth of 160k in June, after a surprisingly low 75k gain in May. A consensus payrolls print would see the three-month moving average stay at about 150k which, while slower than the pace of job growth in recent years, should still be sufficient to push the unemployment rate lower over time. The market expects the unemployment rate to remain at 3.6%, equalling its lowest reading since 1969, and annual wage growth to pick back up to 3.2%.
Even a strong payrolls report is unlikely to deter the Fed from cutting rates at its meeting later this month it seems, although expectations for a 50bp move will likely be pared back. A weaker than expected result will surely see heightened expectations that the Fed will commence its easing cycle with a 50bp move (the market prices 33bps at present). The read across from payrolls to equity markets is less clear cut. Recent equity market reactions suggest we might be moving back into a world where ‘bad news is good news’, if the market interprets weaker data as increasing the chances of more aggressive monetary policy easing. This environment can plausibly persist as long as the market perceives the Fed’s actions as likely to reduce the risk of a major economic slow-down and avert recession.