Markets have remained listless, given the lack of news. US equities are probing fresh record highs while US treasury yields have remained tightly range-bound. The NZD sustained yesterday’s modest loss, ahead of an expected RBNZ rate cut today.
Markets were quiet overnight, ahead of a speech by President Trump delivered from 6am this morning NZ time. Even then, the market has been insensitive to his soundbites (so far), as he boasts how well the US economy and stockmarket have performed since his election, despite the actions of the Federal Reserve.
After the Veteran Day’s holiday, the US 10-year treasury yield is down 2bps from the weekend close, trading in a tight 1.91-1.95% range. The S&P500 is currently up 0.3%, temporarily crossing the 3100 mark for the first time in early trading.
The Bank of America’s November survey of fund managers showed a bullish tilt towards markets, with net expectations for a stronger world economy back into positive territory for the first time in over a year. Cash levels plunged to their lowest level since mid-2013 as managers reallocated to equity markets, seeing them as the best performing asset class, ahead of commodities, while bond allocations were also cut.
In economic news, Germany’s ZEW investor expectations survey showed a sharp improvement in economic sentiment, albeit still in negative territory. UK labour market data showed falling employment and softer wage inflation, although the “discouraged worker” effect saw the unemployment rate nudge back down to 3.8%. The US small business survey showed an insignificant lift in confidence and, encouragingly, a small lift in capital spending expectations.
Yesterday, the RBNZ’s survey of expectations showed 2-year inflation expectations slipping from 1.86% to 1.80%. While the slippage was forewarned by the ANZ survey and soft headline CPI data, this was enough to see Westpac change its OCR call again and move into the pack seeing a 25bps cut later today. OIS pricing for today’s meeting fell 4bps to 0.81%, suggesting that the market is now 76% priced for a 25bps cut (up from a 60% chance). Swap and government bond rates were down 2-3bps across the curve.
The NZD was weaker heading into the inflation expectations report and it fell further after its release, seeing it unwind its outperformance during the overnight session and finding support at 0.6330, back to where it began the week. Elsewhere there have been insignificant currency movements. Thus, the NZD is weaker on all the crosses over the past 24 hours. The AUD has been hovering around the 0.6845 mark, with NZD/AUD near 0.9250, after meeting some resistance just under 0.93 early yesterday afternoon.
Focus today turns to the RBNZ’s Monetary Policy Statement and while most economists are picking a 25bps rate cut and the market sees the same risk, there is always the chance that the committee errs on the side of common sense and public opinion and leaves the OCR unchanged. Our business contacts continue to point to the futility of further rate cuts, and the 50bps August cut seemingly had a negative impact on confidence.
We’d see a rate cut having a small downward impact on short-end rates and NZD and much less of an impact at the longer end of the curve, if any. The NZD looks significantly oversold against our short-term fair value model, so the removal of this risk event could easily support the currency once the dust settles. A no-change decision could see rates shift higher by 10-15bps, led by the front-end of the curve, while the NZD would clearly strengthen.
Elsewhere, tonight’s US CPI data will be keenly monitored and Fed Chair Powell gives a testimony to a government committee, where he will reiterate the Fed’s message from the end of October, but the Q&A could throw up some market-moving headlines.