US equities continued to power ahead to fresh record highs overnight with the US and China finally signing the long-awaited Phase-One trade deal. In contrast, global rates have fallen, after a very weak UK CPI release led the market to price a better-than-even chance of a BoE rate cut later this month. Despite broad-based USD weakness, the NZD has again underperformed and is unchanged from this time yesterday.
A short while ago, the US and China signed the Phase One trade deal. In the preceding press conference, Trump said Phase-Two talks would start shortly and all tariffs would be removed after this phase was completed. However, with the two sides prioritising the ‘easy wins’ in Phase-One, leaving the more complicated and structural issues such as Chinese state subsidies for the second phase, Phase-Two is likely to be a long slog. Bloomberg reported yesterday that the US would keep the current tariffs on Chinese imports in place until after the election in November to ensure that China complies with the agreement.
Market sentiment remains very positive, with US equities pushing ahead to new highs overnight. The S&P500 is 0.2% higher while the VIX remains very low, near 12. Although it should have been well-priced by now, the signing of the trade deal is seen as reducing the risk of a flare-up in US-China trade tensions this year and a sign that Trump doesn’t want to compromise the economy or stock market in the lead-up to the election later this year. Equities received a boost from comments by White House economic advisor Kudlow who told CNBC that the administration was working on plans for a second round of tax cuts, aimed at the middle class. However, unless the Republicans win back Congress later this year – something the prediction markets see as unlikely – these plans are unlikely to happen. The Financials sector underperformed the broader market overnight following softer earnings from both Bank of America and Goldman Sachs, although both saw a rebound in trading revenue last quarter.
UK rates plunged and the GBP underperformed overnight after a much weaker-than-expected CPI release. Core inflation fell to just 1.4%, its lowest level since late-2016 (before the post-referendum fall in the pound boosted UK inflation). Several BoE MPC members, including Governor Carney and external members Tenreyro, and Vlieghe, have made dovish noises recently, with Vlieghe saying over the weekend he would need to see “an imminent and significant improvement in UK data to justify waiting a little bit longer.” The weaker CPI data could push these members to join the two who were already prepared to vote for a rate cut at the last meeting (including Michael Saunders, who reiterated his case for more stimulus in a speech overnight). The market moved to price a 65% chance of a cut in January, with a 25bp cut fully-priced by May. The UK 10 year gilt yield fell 7bps to 0.65% while the GBP fell back below 1.30 before subsequently recovering. The GBP underperformed most other major currencies overnight.
The fall in gilt yields spilled over into the US and European markets, although US rates have since mostly recovered. The 10 year US Treasury yield is at similar level to the close of the NZ trading day, at 1.8%, having traded a couple of basis points lower at one point overnight. The continued rise in equity markets again had little impact on US rates, with the 10 year yield remaining firmly contained within a 1.70% – 1.95% range amidst expectations the Fed is reluctant to move rates in either direction.
Dallas Fed President Kaplan told Bloomberg that he believed risk assets had been boosted by the Fed’s recent expansion of its balance sheet, along with the rate cuts last year and the market’s perception that, going forward, the Fed is reluctant to hike. The Fed resumed buying Treasury bills late last year to counter pressures in the repo market, but Kaplan warned that the Fed should consider financial stability in its framework and have a plan for tempering the growth in the balance sheet going forward.
US data released overnight was second-tier and had little impact. PPI was in-line with expectations while the Empire manufacturing survey (based on firms in the New York region) increased slightly, although this regional survey hasn’t provided a very good steer on the nationwide ISM survey over the past year. In Germany, the statistics office reported that the German economy had grown at a meagre 0.6% pace last year, although this matched economist estimates.
The USD is weaker across-the-board over the past 24 hours although the magnitude of the move (a 0.1% fall in the Bloomberg DXY) is modest. The USD indices remain range bound. The Swiss franc has been the top-performing currency (+0.4%) following on from US Treasury’s announcement yesterday that it had designated the country a currency manipulators (the market is therefore testing whether the SNB will pull back on its intervention activities that it has been using to lean against franc strength). The JPY has underperformed amidst the risk-on backdrop as it hovers just below 110.
The NZD has underperformed, leaving it as the worst performing G10 currency for the second day running. The NZD reached a one-month low overnight at 0.6520 although it has since bounced back to be unchanged on the day, at 0.6615. There doesn’t appear a clear catalyst for the NZD underperformance with little change in OCR expectations over the past few days. We continue to see the NZD as being on the cheap side.
In domestic data released yesterday, NZ food prices fell 0.2% in December, which was close to our estimate and kept our Q4 CPI forecast at 0.5% (higher than RBNZ's 0.2%). CPI is released next Friday. NZ rates fell 1-2bps yesterday, in-line with global moves.
NZ electronic card spending data is released this morning and US retail sales is the data highlight tonight.