Markets are well-contained as trading volumes soften ahead of the holiday season. US equities are flat near record highs while global rates are higher and the US 2s10s yield curve is the steepest since July. Currency movements have been modest, with a hint of CAD strength and GBP weakness.
There aren’t many news headlines out there. President Trump is about to be impeached, but markets aren’t really interested, with the Senate indicating that he won’t be removed from office so nothing much will change.
In economic news overnight, IFO’s business expectations index for Germany rose for the third consecutive month, beating market expectations. The data suggests that Germany’s economy might be crawling out of recessionary-like conditions, setting the scene for improved growth through early 2020. While the data had little impact on the euro, Germany rates trended higher after the release, with the 10-year rate up 4bps to -0.43%.
US rates are also higher, lifting from the US open, taking the 10-year Treasury yield as high as 1.93%, up 5bps for the day, where it has met some resistance. With short-term rates underpinned by expectations of little change in monetary policy ahead, even if a modest easing bias remains, the 2s10s curve increased to 29bps, the steepest since July. NY Fed President Williams ran the line that “monetary policy is in a good place” supporting a likely good economic performance in 2020. The outlook for policy depended on how economic conditions change, with a “material” change needed to adjust “our” policy view, consistent with the line run by Fed Chair Powell.
Canada core CPI inflation was slightly stronger than expected, with the average of 3 core measures up to 2.2%, the strongest rate in a decade. The data reduce the chance of the Bank of Canada joining the global easing cycle and CAD was the strongest of the majors, seeing USD/CAD down 0.3% to 1.3120 for the day. Sentiment for CAD was also supported by the White House announcement that would pave the way for cheaper Canadian prescription medicines to be imported from Canada, to help lower drug prices for the US.
The NZD rose to 0.6590 overnight but is back down to 0.6575, up slightly from the NZ close. In our last GFXS for the year we left our projections for next year pitched between 0.65-0.67. After pondering whether these central forecasts ought to be upgraded, we left them unchanged and simply flagged some modest upside risk, and will take a fresh look at them early in the New Year. Further upside potential for the NZD reflects our constructive view of the global economic outlook, but tempered by the view that NZ commodity prices might have already peaked after recent strong upward momentum.
The AUD has hovered around the 0.6850 mark overnight.
GBP is the softest of the majors, losing further ground after PM Johnson looked to prevent the UK from extending the Brexit transition process beyond the end of next year, ingrained into fresh legislation in the Withdrawal Agreement Bill. GBP is currently down 0.4% for the day to 1.3080. NZD/GBP has moved from the bottom to the top of its two-month trading range in the space of 48 hours, meeting some resistance at 0.5040.
UK core inflation remained steady at 1.7% in November. The Bank of England meets tonight and is expected to keep rates on hold. The fog of Brexit might have cleared a little, but there is still a lot of water to go under the bridge and the market sees greater chance of easier than tighter policy from early next year.
In the day ahead Q3 GDP data for NZ are released, with the dated data expected to show modest growth of 0.5% q/q, alongside some upward revisions to history over the past few years, which suggests caution in jumping to any conclusions. That modest rate of expansion would make the NZ economy one of the strongest in the developed world over the quarter, not a hard milestone to beat against the backdrop of the slump in world trade and global risks prevailing at the time. Australian employment data this afternoon always has the scope for some market reaction, even if most traders have given up for the year and are more focused on extending their waistlines than their trading book. The BoJ is unanimously expected to keep policy on hold, with that view supported by the recent easing in fiscal policy.