Markets continue to tread water as investors await Fed Chair Powell’s semi-annual testimony to Congress tonight. There has been little movement in either US bonds or equity markets over the past 24 hours. The NZD has drifted down to 0.66 against a backdrop of a slightly stronger USD.
It’s been a very similar story to yesterday, with no major economic data of note over the past 24 hours and market movements subdued ahead of Powell’s testimony. On the trade-front, the US confirmed that US Trade Representative Lighthizer and Treasury Secretary Mnuchin had spoken with Chinese Vice Premier Liu by telephone and that talks would continue “as appropriate”, although there was no comment on the substance of the discussion.
US Treasury yields have continued to consolidate after their payrolls-induced increase, with the 10 year rate trading at 2.06%. The S&P500 opened 0.4% lower but has fully reversed that move over the course of the session and is now unchanged on the day.
Ahead of Powell’s testimony, Philadelphia Fed President Harker cautioned that, in his view, “there’s no immediate need to move rates in either direction at this point.” Harker, who isn’t a voting member of the FOMC this year, added that the labour market remained “very strong”. The market will of course put far more weight on what Chair Powell has to say tonight. The market prices 27bps for the Fed’s meeting later this month and 65bps of cuts by the end of year.
The DXY dollar index has continued to drift higher ahead of the Powell testimony (+0.1%). The DXY has now risen for five consecutive sessions and, at 97.5, it is trading in the upper-half of its 95.0 to 98.25 effective range thus far in 2019. The Bloomberg DXY has appreciated by slightly more (+0.2%) after the Mexican peso (which has a 10% weight in the index) fell as much as 2% after its Finance Minister unexpectedly resigned, blaming disagreement with some of the left-wing government’s policies and the “imposition of officials who don’t know about public finances.”
The GBP fell to its lowest level since April 2017 overnight, reaching a low of 1.2440, with markets remaining concerned about the slow-down in UK growth and the risk of a no-deal Brexit and possible new elections. Betting markets put around a 95% probability that Boris Johnson, who has said he intends to take the UK out of the EU on the 31st October “come what may”, will become the next Prime Minister. Parliament has been voting on amendments over the past half hour that would seek to restrict the ability of the next Prime Minister (likely Johnson) proroguing parliament to force through Brexit. The GBP has recovered slightly to 1.2470, but it is still the second weakest currency in the G10 overnight.
The AUD is the weakest of the G10 currencies over the past 24 hours, down 0.6% to 0.6930. The NAB business survey released yesterday revealed that business confidence largely unwound its sharp bounce in May while business conditions remained below average. Our NAB colleagues noted that the survey suggests the Australian economy is unlikely to record a significant pickup in growth in Q2 while forward orders, which remain below average, suggest a near-term turn around in business activity is unlikely. The survey was undertaken after the June rate cut but predated the follow-up rate cut in July and the passing of the government’s personal income tax cuts. The NZD has drifted lower, in sympathy with the AUD, and is down 0.25% since this time yesterday, to 0.66.
The Australian prudential regulator, APRA, announced yesterday that it would lower the amount of extra capital that the Big 4 Australian banks need to raise by the start of 2024, from the initially proposed 4-5% to, instead, 3%. APRA’s long-term target, that the major Australian banks increase capital by 4-5% remains unchanged, but the regulator will spend the next four years considering “the most feasible alternative method of sourcing the remaining one to two percentage points, taking into account the particular characteristics of the Australian financial system.” In contrast to the RBNZ, APRA expects that the major Australian banks will largely meet the higher capital requirements through issuance of cheaper Tier 2 securities, rather than Tier 1 capital (such as retained earnings and common equity). Nevertheless, APRA felt that the Tier 2 market could have capacity issues absorbing the initially proposed 4-5% increase over the next four years, and the new, lower target would limit the increase in bank funding costs and reduce the risks of unintended side-effects. APRA estimates that overall bank funding costs for the Big 4 will increase by less than 5bps as a result of the new proposal.
The question now is what the RBNZ decides on with its own capital proposal. The RBNZ’s initial proposal was that the Big 4 NZ banks would need to hold a minimum level of Tier 1 capital of 16%, a 7.5% increase from the current regulatory minimum (although all the banks have Tier 1 capital ratios significantly in excess of the current regulatory minimum). Comments from Governor Orr and Deputy Governor Bascand over the past few months suggest the Bank is still open-minded about the final form of the new capital requirements, both in terms of the end-point capital required, the implementation period, and whether hybrid debt might be included. While Orr and Bascand have consistently said NZ banks need to hold more capital, and good quality capital, the exact parameters still need to be finalised. The RBNZ will announce the outcome of its review in November.
Powell’s testimony is the focus tonight. The FOMC minutes are also released and the Bank of Canada is expected to keep rates on hold at its monetary policy meeting.