It has been more of the same overnight, with equity markets making new highs but subdued moves in bond yields and currencies. Better-than-expected US data has supported the USD, but the NZD has outperformed and is up on the day.
Global markets continue to trade with a risk-on vibe. US equity indices have extended recent gains and increased 0.6% overnight, making fresh record highs in the process. Better-than-expected US data released overnight (see more below) alongside a very strong earnings report from Morgan Stanley boosted equities, with all sectors of the S&P500 in the green. A short while ago, the USMCA trade agreement (the replacement for NAFTA) passed the senate and will now go to Trump to sign it off. The broader backdrop remains supportive, with US-China tensions having subsided and global growth improving but with no threat of rate hikes from major central banks. That said, after such a strong run, there is always the risk of a correction.
In economic data, US retail sales beat expectations in December, although downward revisions to the prior two months (totalling 0.5% on the ‘Control Group’ measure) took some of the gloss off the report. The US consumer remains in good shape given the elevated levels of the stock market and consumer confidence and a 50-year low in the unemployment rate. The Philly Fed business survey was also well above expectations with the detail revealing increases to the key new orders and employment categories. But, much like the Empire survey yesterday, the Philly Fed has given an unreliable steer to the more important ISM over the past 12 months. Meanwhile, Chinese December aggregate financing (a broad measure of credit growth) was significantly higher than expected although this was mainly due to changes in the definition of the survey.
US rates and the USD moved higher after the release of the US data, although the moves have been modest. The 10 year Treasury yield has nudged up 3bps to 1.81% but it remains firmly range-bound. Market participants are sceptical that the Fed will raise rates again for the foreseeable future, even if data improves further and the stock market makes new record highs. So far this year, the S&P500 is up 2.3% while the 10 year yield has fallen 10bps.
The Bloomberg DXY is 0.1% stronger, effectively reversing its move from yesterday. Like with rates, the USD remains range-bound and volatility subdued. The JPY has again underperformed (-0.2%), with USD/JPY trading above the 110 mark again, consistent with the increase in US rates and equities and the upbeat sentiment in markets. USD/JPY looks set to close at its highest level since May. The GBP has been the top-performing currency over the past 24 hours (+0.3%) despite the market continuing to price around a 60% chance of a cut by the BoE later this month. With the chance of a move in January still delicately poised, the UK PMIs next week are likely to have a major influence on market expectations of a move.
The NZD has outperformed, and NZ rates have increased relative to offshore, after a flurry of generally positive (mainly second-tier) NZ data over the past 24 hours. The NZD traded up to as high as 0.6665 in the New York morning before dropping back after those US data releases as the USD strengthened across-the-board. Compared to this time yesterday, the NZD is trading 0.2% higher, at 0.6630. The NZD/AUD cross have risen back above 0.96. NZ rates were marginally higher yesterday (2 year swap +1bp) despite small falls in US and Australian rates.
In terms of that domestic data, the ANZ monthly inflation gauge released yesterday pointed to the risk of another strong non-tradables inflation print when Q4 CPI is revealed next Friday. The gauge, which has had a good relationship with actual non-tradables outturns, increased 0.8% in Q4 (for comparison, the RBNZ forecasts a 0.6% increase). This would bring the annual rate of non-tradables inflation to a fresh 10-year high of 3.3%.
Meanwhile, monthly electronic card transactions data showed a sharper-than-expected decline in December. However, the fall in card spending looked more like an unwind after a very strong (likely Black Friday-influenced) November than a change in the underlying pace of consumer demand. One positive for consumer spending is the housing market, which has continued its recent resurgence according to REINZ data. The days to sell a property, usually a good leading indicator of future house price growth, continued to drift lower amidst reports of low levels of inventory. And as for house prices, the composition-controlled House Price Index was up 0.5% in December, bringing its annual rate of increase to 6.6%. The resurgence in the housing market, improvement in NZ business surveys, stabilisation in global growth amidst the US-China trade de-escalation, and the increase in domestic inflation pressure are among the reasons we think the RBNZ can afford to resist further OCR cuts this year.
The monthly dump of Chinese activity data takes place this afternoon as well as Q4 Chinese GDP. Vice Premier Liu said yesterday that China’s GDP was estimated to have grown above 6% in 2019, potentially foreshadowing an upside surprise this afternoon. The NZ PMI is released this morning.