Markets have been fairly listless with modest changes across FX, equity and bond markets. The NZD has traded a less than 30pip range over the past 24 hours, hovering around the 0.6375 mark.
There has been a dearth of news overnight with the only feature of note being a Reuters report that the Xi-Trump meeting to sign a trade deal could be delayed until December, as talks continue over the terms and venue. The senior Trump administration official added that a deal was more likely than not, with China’s push for more tariff rollbacks not seen derailing progress towards a deal.
The delay of a trade deal sent the US 10-year Treasury rate down to the bottom of its overnight trading range of 1.82%-1.86%, and down about 2bps from the NZ close. In Fed-speak, Chicago Fed President Evans (voter) said that Fed policy “is in a good place”, implying he was happy with the current setting and the on-hold policy view. He commented that it is very difficult to generate inflation in the current environment and he’s comfortable with 2.5% inflation to build momentum to get it sustainably to the Fed’s 2% target. This is consistent with the view that the Fed would be happy to allow inflation to overshoot the target in the short term before responding with higher rates, in order to lift inflation expectations and ultimately make the Fed’s job easier in the long run. NY Fed President Williams said that the FOMC had moved policy to a slightly accommodative stance and he believed the three rate cuts were very effective at managing risks to the US economy. He added that the Fed will be data dependent and pre-emptive going forward.
There have been few economic data releases overnight, but indicators out of the euro area provided further evidence of growth being at a transition point, with a hint of positivity. Final euro area PMIs were stronger than the flash estimates, and showed a mild increase for October, while German factory orders were stronger than expected. Germany’s Economy Ministry said that the 1.3% monthly increase could signal a bottoming out of orders.
Yesterday, the key variables from the NZ labour market data releases were close to market expectations, so they didn’t make the RBNZ’s rate decision next week any easier to second-guess. On the inflationary side, annual wage inflation made fresh highs for the cycle to rates not seen in a decade. There’s unquestionably a strong domestic inflationary pulse, with nominal wage inflation running near 4% y/y and with previously released data showing non-tradeables CPI inflation running above 3%. However, on the activity side, employment growth remained sluggish, while the unemployment rate nudged up to 4.2% after the lunge down to 3.9% in Q2. However, of note the underutilisation rate, a broader measure of spare capacity in the labour market, fell to an 11-year low of 10.4%.
Perhaps fearing a stronger result, the market’s interpretation was that the data slightly increased the chance of the Bank delivering a 25bps rate cut next week, with OIS pricing for the meeting closing the day at 0.83% from the previous close of 0.86%, taking the probability of a 25bps cut up to about a two-in-three chance. Against a backdrop of upward pressure on global rates from the previous overnight session, the swap curve was little changed, with 2-year swap rate down 1bp to 1.06% and 10-year swap up 1bp to 1.51%.
Currency markets have showed only modest movements since this time yesterday, with the key majors we monitor all within 0.2% of levels prevailing this time yesterday. The NZD has been contained within a 30pip range of 0.6360-0.6390, moving to the bottom of the range after the trade deal delay news. Our NY sales desk reports NZ option flow above average with demand for calls for the end of November, after the RBNZ’s meeting. This might suggest that even as the fundamental picture for the NZD has improved – with reduced global growth risks and higher commodity prices – the NZD might just continue to track sideways until the RBNZ meeting is out of the way. One could imagine a mild fall for the NZD on the day if the RBNZ delivers a (possible) final rate cut before buyers return and drive the NZD higher towards a fairer value.
The lower OIS pricing for November didn’t do much sustained harm to the NZD, with NZD/AUD falling 20pips or so and after reaching a low of 0.9235 late yesterday, near a key support level, it returned back to 0.9260 overnight. The NZD remains little changed on the other crosses.
In the day ahead, there are only second tier economic releases. The Bank of England meets tonight and we can’t imagine any change in views ahead of the 12 December general election, which might clarify somewhat the outlook for Brexit.