Equities rebound, bond yields stay low. Bank of Canada cuts 50bps, to 1.25%. RBNZ hints that it will wait until March 25 to decide. NZD drifts higher over the past 24 hours

Equities have rebounded overnight, helped by Joe Biden’s performance in ‘Super Tuesday’ and expectations of more stimulus, but bond yields remain near record-low levels.  The Bank of Canada was the latest central bank to cut its cash rate overnight, by 50bps.  There was speculation that the RBNZ might cut rates yesterday (intra-meeting) but, clearly, no cut transpired and the RBNZ hinted it would wait until its scheduled meeting on the 25th to decide on the OCR. 

Markets remain volatile and sentiment driven.  Equities have performed better over the past 24 hours despite a steady stream of negative news on COVID-19.  The S&P500 is currently up 2.6%, reversing its losses incurred the previous day.  The S&P500 is still around 9% below its recent record highs.  

The market has taken comfort from the announcement of more stimulus measures (the Bank of Canada cut by 50bps overnight), the expectation that there is more stimulus to come from policymakers, and Joe Biden’s strong performance in the Democratic primaries.  The betting markets now have Biden as a strong favourite (80% chance) of being the Democratic Presidential candidate, reducing the risk that Bernie Sanders could become President and implement his radical policy agenda. 

On COVID-19, there has been a predictable stream of negative headlines and a further rise in cases outside China.  A local emergency has been declared in the Los Angeles area after 6 new cases were discovered over the past 48 hours.  The total in the US is now 128.  The virus has now spread across most countries in Europe, with the UK seeing its confirmed cases jump from 51 to 85 yesterday.  There are reports that banks in the City of London are looking to shifting some staff to disaster recovery sites.  Meanwhile, the Italian government confirmed it would close schools nationwide until March 15.  On the economic impact, an internal EU briefing paper said that both Italy and France could experience a recession, which could potentially reawaken market concerns about Italy’s very high debt load.  The IMF joined the chorus of policymakers highlighting the risks of the global economy, saying the outlook had shifted to “more dire scenarios”. 

Markets are looking ahead to more stimulus from both fiscal and monetary authorities.  Overnight, the Bank of Canada joined the Fed and RBA in easing monetary policy, cutting its policy rate by 50bps, from 1.75% to 1.25%, at its scheduled meeting (the market was 70% priced for such a move).  The BoC said “the outlook is clearly weaker now than it was in January”, adding that it will “adjust monetary policy further if required.”   There has been speculation that the BoE will cut rates intra-meeting, but new Governor Andrew Bailey said he wanted to see more evidence before deciding on the next move.  The BoE meets on the 27th of March, with the markets pricing a 40% chance of a 50bp rate cut. 

Despite the more positive market sentiment over the past 24 hours, bond yields have fallen further amidst expectations of further central bank easing.  The US 10-year Treasury yield broke below 1% yesterday morning for the first time on record - it currently trades at 0.98%.  Despite having just cut 50bps two days ago, the market prices another 33bps of cuts for the Fed’s scheduled meeting on March 19.  The market expects the Fed to act aggressively and pre-emptively, with the overriding objective of trying to prevent a recession.  The playbook appears straight out of NY Fed President John Williams’ speech from July last year, in which his first conclusion, in terms of operating policy near the zero lower bound, was “don’t keep your powder dry—that is, move more quickly to add monetary stimulus than you otherwise might.”

NZ rates had another big move lower yesterday, especially the front-end of the curve, after the Fed’s 50bp rate cut.  The 2-year swap rate ended 10bps lower on the day, at just 0.64%, with the market moving to price 0.57% for the March meeting (ie. a 70% chance of a 50bp move).  BNZ changed its call on the RBNZ yesterday and we now expect a 25bp rate cut later this month, with the risk of a further cut in May. 

Following the Fed’s intra-meeting (‘emergency’) rate cut the previous night, there had also been speculation that the RBNZ might follow suit and cut rates itself intra-meeting.  As it happened, there was clearly no rate cut from the RBNZ yesterday.  An RBNZ speech release yesterday mentioned the “next OCR decision is scheduled for March 25”, suggesting that the Bank isn’t considering an intra-meeting move.  The speech, which Governor Orr will deliver next Tuesday, will set out the Bank’s high-level principles for unconventional monetary policy and should make for interesting reading, although it won’t discuss current economic conditions or the RBNZ’s outlook for the OCR. 

There was another big move tighter in NZ swap spreads yesterday – the 10-year swap rate fell 8bps while the 10-year government bond yield fell just 2bps.  The 10-year swap spread has moved 17bps tighter in just three trading sessions, a sign to us that the market expects the supply of government bonds will be increased materially (with COVID-19 likely to see a weaker growth outlook, and hence lower tax revenue, and the government likely to announce more fiscal easing). 

The USD has managed a modest bounce overnight, halting its recent downtrend.  The BBDXY is up 0.2% overnight, having previously fallen almost 2% in the space of a fortnight amidst growing Fed rate cut expectations.  The Bank of Canada’s 50bp rate cut has seen the Canadian dollar fall 0.2% on the day. 

The AUD and NZD have both drifted higher over the past 24 hours, to around 0.6615 and 0.6285 respectively.  The improvement in risk appetite and a marginally stronger Australian GDP report added some support. 

Economic data has been largely shrugged off by the market, given it mostly predates the global spread of COVID-19.  For the record, the ISM non-manufacturing survey increased by more than expected, to an above-average 57.3 reading, while the ADP employment survey was strong, but this has had an inconsistent relationship (month-to-month) with nonfarm payrolls.  The China Caixin Services PMI fell to a record low level of 26.5, although this wasn’t much for a surprise to the market in light of the previously reported fall in the official services PMI. 

In Australia, Q4 GDP was a little stronger-than-expected, at 0.5% in Q4.  RBA Deputy Governor Debelle said yesterday he expected the combined impact of the bushfires and the coronavirus on education and tourism to take around 0.7% off Q1 GDP (q/q), implying it may well be flat to negative.  Debelle reiterated that the RBA saw the likely effective lower bound for the cash rate as 0.25% and, if further easing were needed at that point, it was likely to be QE.