Spreading coronavirus remains the key market focus. NZD and AUD fall to fresh lows for the year. UST yields turn back down despite robust employment report

Market focus remained on the deadly coronavirus, seeing global equities ending the week on a softer note, and downside pressure on US Treasury yields returning, despite a solid employment report. The NZD and AUD fell to fresh lows for the year, the latter even breaking down through last year’s low.

The number of confirmed cases and deaths from the coronavirus outbreak continues to rise at a steady pace. And while almost all deaths have been confined to one province in China, the number countries with confirmed cases of the virus continues to grow. The low mortality rate of around 2% remains of some comfort, but the economic impact of travel restrictions and production shutdowns is growing by the day.

After reaching new cycle highs in the previous session, US equities slipped on Friday, with more respect given to the growing coronavirus epidemic. Still, the S&P500 only fell by 0.5%, making for a weekly gain of 3.2%, the best result since June.

The US 10-year Treasury yield fell steadily through the day, with only a brief respite after the US employment report, suggesting that the coronavirus was the predominant force on market pricing. The 10-year rate ended the session down 6bps to 1.58%. US non-farm payrolls were stronger than expected at 225k for the month, while the unemployment rate remained at a historically low level, even as it edged higher to 3.6%, helped by a fresh cyclical high in the labour force participation rate. Annual wage inflation remained fairly steady at just over 3%.In sum, the data painted a picture of a healthy labour market, driving solid income growth and drawing more people into the labour force that was helping to contain inflationary pressure. In its semi-annual report to Congress, the Fed warned that the coronavirus posed a new risk to the outlook.  We’ll hear more from Fed Chair Powell this week in his testimony to lawmakers, alongside hours of Q&A.

In currency markets, JPY was the best performer, reflecting the risk-off sentiment. The USD was stronger against the other majors, reflecting its safe-haven attributes and strong relative economic performance. Sentiment for the euro remained downbeat, not helped by further soft data, with EUR/USD down 0.3% to below 1.0950. German industrial production unexpectedly plunged in December, questioning whether its economy was ready to pull itself out of an economic slump. Figures were also weak across France, Spain and the Netherlands, adding to the negative sentiment prevailing over the euro area economy. The euro area economy will find it difficult to catch up to the US over the near-term, given its greater exposure China and the negative impact of the coronavirus.

Most exposed of the majors, however are the NZD and AUD, given their high exposure to China’s economy and this is reflected in their ongoing underperformance. The AUD fell to a post GFC low of 0.6662, before ending the week not much higher than that.  Even a less dovish RBA Governor couldn’t support the AUD. In his testimony to Parliament, Governor Lowe voiced financial stability concerns from lower rates and remains reluctant to cut again.

The NZD took a peek below 0.64 before closing the week near that level, down 0.9% for the day. The NZD has fallen almost every day since the coronavirus first got the attention of international media from about 20 January. Until we see some positive news about the spreading coronavirus, headwinds for the AUD and NZD will continue. Of the commodity currencies, CAD outperformed, with less exposure to China and a strong employment report helping, with signs of accelerating wage inflation, reducing the chance that a weak labour market might see the Bank of Canada ease monetary policy.

NZ rates showed little movement on Friday, falling through the afternoon after gapping up on the open. The bias for rates should be to the downside today, with the Australian 10-year bond future down about 4bps in yield since the NZ close.

The economic calendar is light to start the week, but cranks up from mid-week, with the RBNZ’s Monetary Policy Statement, Fed Chair Powell’s testimony to lawmakers and US CPI and retail sales data being the key economic releases.