Markets in wind-down mode heading into Christmas. Equity markets nudge higher, little change to global rates. Riksbank hikes rates 25bps, ending negative rate policy

There’s not too much to report overnight with markets in the process of winding down before the Christmas break.  The S&P500 has nudged up to a fresh record high while Treasury yields are little changed, near five-month highs.  The USD is generally weaker, with the NZD breaking above 0.66 a short while ago.  NZ GDP data yesterday was broadly in-line with expectations. 

Market movements have been reasonably subdued over the past 24 hours, with market participation and risk appetite starting to wane as we approach Christmas.  US Congress voted yesterday to impeach President Trump but markets have been unperturbed given that the Senate will almost certainly acquit him. Equity markets have continued to grind higher, with the S&P500 rising 0.3% to a fresh record high.  That leaves the S&P500 up some 28% this year, which would be its strongest result since 2013, although its calendar year performance is flattered by the large sell-off that took place this time last year. 

Global rates are little changed from 24 hours ago.  The US 10 year Treasury yield traded as high as 1.95%, near five-month highs, but a downside surprise to the Philadelphia Fed manufacturing index helped push it back at 1.90% - down slightly on the day.  The details of the Philly Fed survey were more encouraging, with increases in the key news orders and shipments categories.  Other economic data has been second-tier and not market moving, including slightly softer US home sales and jobless claims.  The US 2y10y curve has steepened slightly and is now at its steepest level in more than 12 months, at 29bps. 

There has been a flurry of central bank decisions over the past 24 hours, although with no major surprises.  Probably the most interesting has been the Swedish Riksbank, which raised rates from -0.25% to 0%, as universally expected, in turn ending almost five years of negative interest rate policy.  The rate hike took place amidst a slowing in the Swedish economy, suggesting that the Riksbank thought the side effects of the policy were starting to outweigh the benefits (indeed Governor reiterated in the press conference that he saw risks to keeping negative rates for a long period).  The Norwegian central bank kept its policy rate on hold at 1.5%, as expected, but the accompanying statement was perceived as more hawkish than expected, with the central bank continuing to indicate a 40% chance of a hike next year.  The Norwegian krona has been the top performing currency over the past 24 hours, up 0.5% against the USD. 

Elsewhere, the BoE kept its cash rate at 0.75% in a 7-2 decision, as expected.  MPC members Haskel and Saunders continued to dissent in favour of a rate cut.  The minutes to the meeting noted that the Bank was prepared to cut rates if global growth didn’t stabilise or Brexit uncertainty remained entrenched.  The market prices around a two-thirds chance of a rate cut next year.  The GBP fell away from its intraday highs after the BoE decision, and it is again the weakest of the G10 currencies, down 0.4% against the USD to 1.3030.  The weakness in the GBP is probably more related to unwinds of long positions that were built up in anticipation of Boris Johnson’s election victory.  With Brexit returning to focus, the GBP is now around 1% below its pre-election levels.  Finally, the BOJ kept its policy targets and forward guidance unchanged and said it was prepared to ease again, if required. 

Behind the NOK, the AUD is the best performing currency over the past 24 hours, up 0.4% to 0.6880.  Yesterday’s Australian labour market data were stronger than expected with the unemployment rate ticking down to 5.2% and employment rising sharply by 40k. The unemployment rate has been in a range of 5.2-5.3% for the past eight months, suggesting conditions aren’t worsening, but, with the RBA estimating NAIRU at 4.5%, it still suggests considerable slack in the labour market. Our NAB colleagues still expect the RBA to cut the cash rate by 25bp in February, although the market pared back its probability of a February move to 40%.  The NZD/AUD cross continues to hover just below 0.96. 

The stronger AUD has spilled over to the NZD, which trades this morning just above 0.66, 0.2% stronger on the day.  NZ GDP data released yesterday showed the economy grew 0.7% last quarter, higher than both the market consensus (0.5%) and the RBNZ’s MPS forecast (0.3%).  The annual GDP growth rate of 2.3% was bang-on economist expectations however, with the upside surprise to Q3 offset by a downward revision to Q2.  Revisions going further back now reveal a stronger economy than we originally thought in 2018 (3.3% compared to 2.4% on an expenditure basis) but also a sharper slow-down in the first half of 2019.  We saw the GDP data as providing further evidence that the economy is muddling its way through, with most other indicators we monitor suggesting a similar story.  The upside surprise to the quarterly GDP result gave the NZD a 30pip boost, but the reaction faded quickly, with the market looking through to the 2.3% annual growth rate, which matched expectations. 

NZ rates moved higher and steeper yesterday, reflecting the increases in US Treasury and Australian rates.   The front-end of the NZ curve remained relatively sticky with the market seemingly reluctant to reduce OCR easing expectations much further (there are currently 9bps of OCR cuts priced-in by mid-2020).  The 2-year swap rate was up just 1bp yesterday, to 1.25%, while the 10-year rate was 5bps higher, at 1.76%.  The 10 year swap rate is now at a 5-month high, but it’s still almost 100bps below where it was at the end of 2018. 

BNZ Markets Today will not be published over the Christmas/New Year period. Regular publication will resume early-mid January depending on weather and market conditions. We thank you for your readership over the year and hope you have a good break during the festive season.