Locals will return to their desk after the Waitangi Day holiday to see US equities at a fresh record high and global rates higher – and therefore upside pressure on the domestic rates market at the open this morning – and the NZD down slightly against the USD and AUD.
The number of confirmed cases and death toll from the coronavirus in China continues to steadily rise, with the last count over 560 and 28,000 respectively. A number of companies are reporting supply chain issues as a result of the viral epidemic and are closing factories, including a number of auto producers and Airbus, and this has followed closure of stores from many retailers. China National Offshore Oil Corp told some suppliers that it won’t take delivery of LNG it had agreed to, invoking “force majeure” to get out of the contracts. A Chinese copper smelter has invoked the same clause to get out of its commodity contracts. This will directly impact Australia’s exports of LNG, with its high exposure to this industry and other commodity producers. Oil demand, in particular, has slumped since widespread travel bans were imposed. It’s clear that the economic hit to China and indirect effects elsewhere are significant and growing.
Markets are prepared to look through this economic hit, in the belief that the coronavirus will soon ultimately be well contained and any economic weakness in Q1 will therefore give way to a rebound in Q2. The US economy is less affected than others like Australia and NZ and US equities continue to recover and are now back at fresh record highs. The S&P500 has gained every day this week and is currently up 3.6% for the week.
Chinese equities have also recovered strongly. After the CSI300 plunged nearly 8% on Monday after the week-long holiday, it has recovered 6%. Yesterday, sentiment was supported by the news that China will halve the punitive tariffs place on some $75b of US imports on 14 February, the same day that US halves its punitive tariff rate on goods imports that came into effect on 1 September (the 15% tariff rate imposed on $110bn of goods). Of course, the bulk of the punitive tariffs remain in place and these moves are simply the result of the phase 1 trade deal signed last month.
In economic news, while we were on holiday, US data releases were strong, with ADP employment surging well ahead of expectations and setting the scene for a decent read on non-farm payrolls tonight, while the ISM non-manufacturing composite was also on the strong side. Last night, German factory orders data for December were much weaker than expected, down 8.7% y/y and the worst result since the GFC, defying the more positive recent PMI manufacturing readings and raising a question mark about whether Germany’s manufacturing recession is over yet.
The risk-on move sees US Treasury yields higher and less easing priced into the Fed Funds curve. There hasn’t been much movement overnight, but since the NZ close on Wednesday the 10-year yield is up 5bps to 1.64%. The 10-year Australian bond future is up 6bps in yield since the last NZ close. As well as positive risk sentiment yields have been supported by stronger Australian real retail sales, up by 0.5% in Q4, the strongest result in eighteen months and beating market expectations. The data follows a less dovish vibe expressed by Governor Lowe in a speech on Wednesday, which continued to highlight his reluctance to cut rates again. These gains in US and Australian rates will add to the much higher NZ rates we saw on Wednesday.
In currency markets, the USD is well bid, showing broadly based gains, supported by the recent economic data flow and yield advantage. The NZD trades this morning at 0.6460, down slightly from the 0.6480 level when we left the office Wednesday, and losing the gain to just over 0.65 after the stronger labour market data, which showed a lower than expected unemployment rate of 4.0% and wage inflation remaining on an upward trend.
NZD/AUD is also weaker, now trading back below 0.96. The AUD has been supported this week by the on-hold RBA decision, less dovish overtones and yesterday’s stronger retail sales data. Still, the AUD hasn’t managed to keep pace with the stronger USD overnight and it sits at 0.6740. Since the last NZ close, the NZD has made a little ground against the EUR and GBP, which have been on the soft side. EUR/USD has slipped below 1.10 while GBP has slipped to 1.2930. Despite higher risk appetite, NZD/JPY has been hovering around 71 the last couple of days.
In the day ahead we’ll get more colour on the RBA’s policy outlook, with Governor Lowe grilled in front of a Parliamentary Committee, followed by a full forecast update. The key economic release will be the US employment report tonight, where wage inflation is expected to lift after surprising weakness in December, while job growth should remain solid.
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