In a quiet start to the week, US equities are flat and there have been only small changes in global rates and currencies.
It’s a fairly action-packed week ahead, but loaded towards the end of the week, with the FOMC meeting Thursday morning NZ time, the ECB meeting Thursday night and the UK election results coming in Friday. All this comes ahead of a scheduled increase in Chinese import tariffs by the US on 15-December on about $160bn of mainly consumer goods.
Ahead of these risk events, financial markets are quiet and look likely to remain that way over the next day or two. There’s hope that the planned further punitive import tariffs will be postponed, while further US-China negotiations continue. We keep getting told that a possible deal is very close but any deal lies in the hands of the unpredictable President Trump.
Yesterday the FT reported that the Chinese government has ordered all government offices and public institutions to remove foreign computer equipment and software within three years. The report notes that the move is part of a broader campaign to increase China’s reliance on home-made technologies, and is likely to fuel concerns of “decoupling”, with supply chains between the US and China being severed. So deal or no deal, it is clear the trust between the two countries is gone. The endgame looks like a stronger economic force within China and the loss of a major export market for the US.
Economic data releases have been scant. Q3 Japan GDP was revised up by more than expected, from 0.1% to 0.4% q/q, driven by increased business investment. But the stronger base sets the scene for a bigger contraction in Q4, after the sales tax was increased. NZ manufacturing data showed a slight fall in sales, but much stronger production was implied as inventories were rebuilt. The data under the surface was strong enough for us to revise up our NZ Q3 GDP estimate (due next week) from 0.3% to 0.5% q/q. That doesn’t sound flash, but it would still be one of the strongest prints for the quarter compared to major developed economies.
The dated data had no impact on the NZD, which has traded a less than 20pip range to start the week and sits around 0.6555. The AUD has also traded a very tight range around 0.6830. GBP remains well bid around 1.3150 ahead of the general election, where the odds still favour the Conservatives winning a majority of seats.
Global rates have drifted down a touch to start the week. The US 10-year Treasury yield is down 1.5bps to 1.82%. In local trading, the NZ swaps curve steepened, with the 2-year rate down 1bp to 1.24% and the 10-year rate up 4bps to 1.71%, its highest close since July. The 10-year government rate made the same milestone, up 5bps to 1.55%. Our view remains for further underperformance of the NZ bond market, with fiscal stimulus, extra bond supply and an RBNZ likely on hold all in the mix.
The day ahead looks uneventful on paper, with a number of second-tier economic releases, none of which are expected to be market-moving.
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