It was a risk-on session on Friday with positive noises on the Phase-One US China trade agreement and stronger-than-expected US economic data lifting the S&P500 and NASDAQ to fresh record highs. There was less movement in bond and currency markets. The USD remained near three-month lows while the NZD consolidated above 0.64. The week ahead features the NZ HLFS employment survey, the RBA meeting and US non-manufacturing ISM survey.
In terms of Friday’s economic data, nonfarm payrolls increased by 128k in October, above analyst expectations. Adding back the 42k fall in carmakers’ jobs – largely related to a strike by GM workers – suggests payrolls was closer to 170k, representing continued solid US job growth. Upward revisions to the past two months also added a sizeable 95k additional jobs. The pace of private payrolls growth in 2019 (excluding the effect from the GM strike) is now running around 155k which, while slower than last year’s 215k pace, should be sufficient to keep downward pressure on the unemployment rate over time. For October, the unemployment rate ticked up to 3.6%, but only due to an increase in participation, while average hourly earnings were in-line with expectations at 3%.
Separately, the ISM manufacturing survey increased slightly in October, although it missed expectations and remained under the 50 mark (indicating the manufacturing sector remained in contraction). However, there were some encouraging signs within the details of the survey, with both new orders (49.1 vs. 47.3 prev) and new export orders bouncing back in October (50.4 vs. 41 prev). After the extremely weak Chicago PMI data the night before, the ISM survey result wasn’t as bad as some had feared.
The Caixin China manufacturing PMI was also stronger than expected, reaching its highest level since the start of 2017, in a sign that Chinese growth may have bottomed.
Adding to the positive sentiment, late on Friday’s session the Chinese Ministry of Commerce announced that a “consensus in principle” had been achieved on the Phase-One deal, although the US version of events (“made progress”) was a bit more cautious. Earlier, White House economic advisor Larry Kudlow said that the two sides were close to finalising the sections related to Chinese purchases of US agricultural goods, US foreign ownership in the Chinese financial services industry, and currency stability (including safeguards against manipulation). He said that discussion of intellectual property theft had come a long way, but was not yet completed, while forced technology transfer progress was not quite as advanced and might spill over to Phase-Two. Kudlow was coy about the prospect of the December tariffs being suspending as part of the agreement, something China has reportedly demanded. Over the weekend, Commerce Secretary Ross confirmed that the US would shortly be granting licences for companies that want to deal with Huawei. Ross also said the US might not need to put auto tariffs on European imports later this month, in another sign that Trump is ratcheting down his trade fights with other countries.
US rates increased after the payrolls upside surprise and hit their highs of the day (US 10yr 1.74%) after the Chinese trade news. But rates eased lower over the last few hours of trading to close only marginally higher on the day – the 10yr Treasury yield was 2bps higher at 1.71%. Fed officials were out in force on Friday, with influential Vice Chair Clarida saying that both the US economy and monetary policy were in a “good place”, reinforcing the message from the FOMC meeting that rates are likely on hold for some time. However, he saw the risks as still “somewhat” tilted to the downside. The Fed’s greater sensitivity to downside risks and the high hurdle for hikes is likely to restrain US rates from rising too far in the near-term.
Equity markets benefited from the combination of better economic data (and less concern about US recession risk), encouraging comments on US-China Phase-One talks, and the relative stability in rates. The S&P500 increased 1% to a fresh record high while the NASDAQ rose similarly, making a new record high in the process.
The USD attempted to rally after the payrolls release, but the move was short-lived and it ended down for the fifth consecutive day, albeit only by 0.15%. Looking through the day-to-day volatility, the BBDXY is trading very close to its average levels over the past 18 months. The Japanese yen was the only currency to fall against the USD on Friday, unsurprising given the risk-on backdrop and increase in Treasury yields, but the move was modest (-0.15%).
The NZD rose to its highest level since mid-August, at 0.6457, before closing the week around 0.6430. The NZD was up 0.2% on Friday, bringing its weekly gain to 1.2%. The broad-based weakness in the USD and the market’s paring back of OCR rate cut expectations combined to push the NZD to the top of its recent trading range last week. CFTC data released over the weekend showed speculators remained heavily short the NZD as of last Tuesday (with a notional equivalent value of around US$2.6b), even as they cut their overall net long USD position. The NZD is looking very cheap on our short term model, given the lack of response to stronger fundamental factors through October, and combined with this heavy short positioning, there is the risk of a ‘short squeeze’ and break above the top of the recent range in the near-term.
NZ rates followed global moves on Friday, with rates falling and the curve flattening. The front-end of the curve remained sticky with the market having recently grown less convicted about the likelihood of a November rate cut. The 2 year swap was down 1bp but, at 1.02%, it remains near the top of its recent trading range. There was little reaction to the ANZ consumer confidence index, which rebounded in October to near its long-run average. Rates should rebound when the market opens this morning.
The AUD was also up 0.2% on Friday and 1.2% last week, with the market similarly paring back RBA rate cut expectations (the market now only prices around a 25% chance of an RBA cut by year end). Writing in the over the weekend, RBA watcher Terry McCrann suggested that RBA would pause until February and, separately, that he expected Governor Lowe and Treasurer Frydenberg might announce the new Policy Targets Agreement this Tuesday.
The focus for the domestic market in the week ahead is the HLFS employment report. The data can be very volatile, but we are in-line with consensus in looking for the unemployment rate to pick-up to 4.1% from 3.9%. We also look for a further increase in wage growth, with the private ordinary-time LCI shifting up to 2.4% from 2.2%. The RBA meeting is tomorrow and our NAB colleagues expect an on-hold decision (fully-priced by the market) and the bank to retain an easing bias. The non-manufacturing ISM survey, which covers the much larger services sector of the US economy, is the key release offshore this week. The market looks for the index to recover to 53.6 from its three-year lows reached in September.