Market moves have been modest again overnight amidst little fresh news. Bond yields have fallen modestly while equity markets are little changed.
The AUD has risen overnight, brushing off what were initially seen to be dovish RBA minutes, and this has dragged the NZD above 0.6420.
There haven’t been any major developments again overnight. About an hour and a half ago, Bloomberg ran a story that US and Chinese negotiators had returned to the text of the aborted trade deal in May and that China wanted all tariffs imposed after May to be removed immediately and then tariffs imposed before that to be lifted gradually. There were small blips higher in Treasury yields, equities and the AUD on the initial headlines but these moves have since reversed. Meanwhile, the editor of the Global Times, thought to be close to senior levels of the Chinese government, tweeted that Trump was wrong if he thought the Chinese economy was “crumbling” and that this would lead China to make concessions. The market is likely fatigued by the endless US-China trade headlines.
The S&P500 is flat overnight as it consolidates near record highs. Disappointing earnings reports from US retailers Kohl’s and Home Depot have weighed on the Consumer Discretionary sector but this has been offset by gains in Health Care and Tech stocks. The VIX remains very low, at 12.7.
US Treasury yields have drifted lower again overnight, although it’s not obvious what the main catalyst has been. Housing starts and building permits data were both stronger than expected, adding to evidence that the US housing sector continues to gain momentum. NY Fed President John Williams largely reiterated previous comments from Fed officials that monetary policy was in the right place but he was “definitely watching” more for downside risks (i.e. the Fed has a soft easing bias even though it expects to be on hold for some time). The 10 year yield has fallen 3bps to 1.78%, its lowest level in 2 weeks, possibly aided by a 2% fall in crude oil prices.
Currency moves for the majors have been muted. The USD is flat on the day in index terms while the GBP has fallen 0.2% despite the release of more polls showing the Conservatives have extended their lead. Boris Johnson and Jeremy Corbyn go head-to-head in a leaders’ debate in a few hours’ time. The Canadian dollar has underperformed (-0.4%) after Bank of Canada Deputy Governor Wilkins said the Bank had “room for manoeuvre” with interest rates, implying an easing bias.
The AUD has brushed off what were initially perceived to be a dovish set of minutes to the RBA’s November meeting. The minutes revealed that the RBA considered cutting rates in November, although it ultimately decided to stay on hold to assess the impact of recent rate cuts. The market had priced less than a 10% chance of a rate cut for the November meeting, so the revelation that the RBA had considered a cut was seen as dovish. Overnight, RBA watcher Terry McCrann argued that the market shouldn’t overreact to the minutes and that, barring a shock, the RBA won’t cut rates in December, instead reassessing things in February. The market prices around a 25% chance of an RBA cut next month and a 75% chance of a cut by February. The AUD spiked 20pips lower to 0.6785 immediately after the RBA minutes, but it has been onwards and upwards since then and it is now trading around 0.6830, a rise of 0.3% on the day.
The NZD has tracked the broad movements in the AUD over the past 24 hours and has been the top performing G10 currency, up 0.5% to 0.6425. The Global Dairy Trade auction overnight revealed a 1.7% gain in the overall price index, its fifth consecutive rise, and a 2.2% gain in the whole milk powder index. These were towards the bottom of where we saw the range of likely outcomes, but the overall backdrop – of strong prices and a largely unresponsive NZD – is still very supportive. The NZD faces resistance around 0.6450.
NZ rates fell 1.5bps to 2bps yesterday, dragged down by the fall in Australian rates after the release of the RBA meeting minutes. There was little reaction to comments from RBNZ Assistant Governor Christian Hawkesby who reiterated that the economy was in good shape but the Bank was prepared to ease again if needed. Hawkesby highlighted the importance of the global outlook to the Bank’s policy deliberations.
There is little on the cards for the session ahead although undoubtedly there will be more US-China trade headlines at some point.