Equity markets consolidate while bond yields and commodities fall. NZD makes an eight-week low amidst weakness in commodity currencies

Equity markets have consolidated overnight after rebounding sharply yesterday.  But market sentiment remains cautious amidst concern about the potential economic fallout from the coronavirus, with global rates and commodity currencies drifting lower over the past 24 hours.  The NZD has fallen to 0.6520, its lowest level in almost two-months.  The FOMC meeting takes place at 8am NZT. 

The coronavirus remains the market’s primary focus at present.  The number of people infected with the virus continues to rise sharply, with the total number of cases in China now exceeding those during the SARS epidemic, although the mortality rate is significantly lower at this stage than SARS (around 2% compared to SARS at 9.6%).  The WHO has called an emergency meeting to decide whether to declare it a global emergency. The potential economic fall-out from the virus is also becoming more visible with BA and Lufthansa cancelling flights to and from China and Toyota saying it would stop all production in China until February 9th.  There is the potential for disruptions to global supply chains if there are more widespread and extended production shutdowns. 

Equity markets haven’t shown too much concern overnight, with the S&P500 rising 0.3% and European indices up between 0.2% and 0.7%.  The movements overnight follow sharp rises in global equities on Wednesday.  Corporate earnings reports have supported equities and deflected attention away from the coronavirus.   Among those to report, Apple beat earnings expectations amid an increase in iPhone sales and GE’s share price rose 10% as investors were encouraged by the progress the company was making in its recovery and cost-cutting plans.  28% of the S&P500 have now reported earnings, with 70% beating analyst expectations so far.  Facebook, Microsoft and Tesla all report after the market close later this morning.  The Hang Seng reopened yesterday after the Chinese New Year break and finished down 2.8%.

Bond markets reflect a greater sense of caution than equities.  Ahead of the FOMC meeting in about an hour’s time, the 10 year Treasury yield has drifted 4bps lower to 1.62%, near its lowest level since mid-October.  In economic data, there was a sharp fall in pending home sales, although the data can be volatile and a broad range of housing indicators indicate a strong US housing market.  The trade balance was larger than expected, which might see some economists shade down expectations for Q4 GDP which is released tomorrow (the consensus is for a 2% (annualised) increase in GDP in Q4).

In terms of the FOMC meeting, there is no change expected to the target range for the fed funds rate (1.5% - 1.75%) and the statement is likely to be similar to December.  There will be a press conference and Powell will undoubtedly be asked about his view on the economic impact of the coronavirus.  There is also market interest in what Powell has to say around the Fed’s plans for its balance sheet.  The Fed is currently purchasing Treasury bills in order to combat pressures in the repo market and some market participants see this as a form of QE that has supported equity markets and other risk assets.  The Fed has said it will purchase Treasury bills at least into the second quarter of 2020, so there is uncertainty around how long the process might last.  While there is no change to the target range expected, the Fed could adjust its Interest on Excess Reserves (IOER) rate 5bps higher, to 1.6%, to keep market rates near the mid-point of its target range. 

Currency markets also reflect a more cautious mood, with the USD and safe-haven JPY having been the best performers over the past 24 hours.  The USD has continued its recent good run, with Bloomberg DXY rising 0.1% to a six-week high. 

There has been weakness in commodity currencies over the past 24 hours, with the NZD sandwiched in between the Norwegian krona (-0.7%) and the CAD (-0.3%) at the bottom of the currency leader board.  Brent crude oil fell around 1% overnight, not helped by a much larger-than-expected increase in crude oil inventories in the weekly DOE report.  The NZD traded down to as low of 0.6506 overnight, a six-week low, and is currently at 0.6520. 

The AUD is also 0.2% lower than this time yesterday despite a slight upside surprise to CPI yesterday. The RBA’s preferred trimmed mean measure of core inflation stayed at 1.6% for the third consecutive quarter and, although this was a slight upside surprise relative to market expectations, it remains well below the RBA’s 2.5% target midpoint.  The market pared back its probability of an RBA rate cut next month following the CPI release to around a 10% chance. 

Locally, RBNZ Assistant Governor Christian Hawkesby gave a speech yesterday on the impact of the global economy on New Zealand.  The speech wasn’t market moving, although there was a hint that the RBNZ retained an easing bias when Hawkesby said "The question for us now is whether enough has been done”, in relation to easing policy.  Hawkesby mentioned the coronavirus was a human tragedy and the RBNZ would monitor its impact on NZ. 

The NZ Government revealed some details of its planned $12b infrastructure stimulus announced late last year.  The plans include $6.8 billion allocated to transport, most of which will go towards roading. 

NZ rates were up sharply across the curve yesterday, by between 3 to 6bps, reflecting movements in global rates the preceding night.  We should see those moves at least partially reverse today given the overnight moves in rates (bond futures imply Australian bond yields have fallen 4-5bps since the NZ market close).  The market continues to price around a 40% chance of an OCR cut this year. 

Besides the FOMC meeting, there is the BoE rate decision tonight (the market is close to 50% priced for a rate cut) and the advance estimate of Q4 US GDP.