Market moves have been subdued overnight ahead of the signing of the US-China Phase-One trade deal tonight. A lower-than-expected US core CPI release has led to a small fall in global rates while equities have moved sideways despite a strong start to the earnings season by the big US banks. Currency moves have been small, but the NZD has underperformed overnight.
Market sentiment remains buoyant, with equity markets lingering near record highs. The signing of the US-China Phase-One trade deal is due to take place tonight alongside the release of the official text to the agreement. According to Politico, the deal will include Chinese targets to buy about $75b in manufactured goods, $50b in energy, $35b-$40b in services and, as previously flagged by US officials, $40b in agriculture. The deal will also cover intellectual property protection, forced technology transfer, currency, and market access to certain sectors of the Chinese economy. Yesterday, the US Treasury formally removed China from its list of currency manipulators. The designation is mainly symbolic, but the move is consistent with the recent improvement in relations between the two countries.
Ahead of the signing, the CNY made a fresh 5½ month high yesterday and it has now returned to the levels that prevailed before the start of August, when Trump unexpectedly announced he would target all Chinese imports with tariffs. USD/CNY is trading around 6.88. Adding to the positive vibe, Chinese trade data released yesterday revealed larger-than-expected increases in both exports (+7.6% y/y) and imports (+16.3% y/y). While favourable base effects created a flattering year-on-year comparison, the trade data paint a picture of a Chinese economy which was stabilising towards the end of 2019, consistent with the message from the PMIs. With Phase-One US-China trade deal about to be signed, the downside risks to the global (and NZ) economy stemming from a slowdown in China appear to have diminished.
In US data, core CPI was slightly lower-than-expected in December (0.1% vs. 0.2% exp), although the year-on-year figure just rounded up to 2.3%, matching the Bloomberg consensus. The volatile used cars and airfares categories accounted for much of the downside surprise in the monthly reading. US Treasury yields have drifted lower, with the 10 year rate down 2bps to 1.82%, reversing its move from yesterday.
The US earnings season for Q4 is now underway, with JP Morgan and Citigroup posting better-than-expected results last night, bolstered by stronger fixed income trading revenues. Both banks saw their share prices rise around 2% and the Financials sector was the top-performing sector overnight in the S&P500 (the index itself was flat, near record highs). Current consensus estimates point to another quarter of negative earnings growth although, based on past history, it’s likely that Q4 earnings growth will ultimately come in slightly positive.
Amidst ongoing positive risk sentiment, USD/JPY broke above 110 yesterday, the first time since May. The EUR reversed an earlier fall after the lower-than-expected US core CPI data, and it is now unchanged on the day.
The ongoing strength in the CNY has had little flow-through to the NZD, which has fallen 0.3% from this time yesterday to around 0.6615. The divergence between the NZD and CNY far in 2020 is unusual (the NZD has fallen 2% while the CNY is 1% stronger), given they have been closely linked since the onset of the trade war. But a broader relationship between the two currencies, looking back over several months, is still apparent.
The NZD is the weakest performing currency over the past 24 hours. The underperformance of the NZD could reflect a delayed reaction to the weaker-than-expected QSBO survey released yesterday, although the magnitude of the move isn’t large. The NZD/AUD cross has fallen to 0.9580, back to where it was at the end of last year. The cross was threatening 0.97 last week.
Yesterday’s QSBO business survey showed an uplift in expected trading activity (+7 from 0) and headline confidence, although the improvement in survey indicators was less pronounced than the recent ANZ survey. The details of the survey were mixed, with employment intentions remaining robust but business investment intentions lingering at their lowest levels since 2009. We interpreted the survey as proving further evidence that the economy is stabilising and consistent with GDP growth of around 2% this year, with the labour market remaining close its maximum sustainable level. We expect the RBNZ to keep the OCR on hold this year, with the hurdle for a move in either direction appearing to be high.
NZ rates markets shrugged off the QSBO and moved 2bps to 5bps higher amidst the positive global market sentiment. The increase in rates was led by the long-end of the curve, following similar sized moves in the US and Australia. Market pricing of an OCR cut this year continues to straddle a 50% probability. Food price data for December is released today, ahead of the all-important CPI release next Friday.