US equity markets have risen overnight, led again by the tech sector, as investors look ahead towards the gradual reopening of economies. Bond yields have increased, and curves steepened, after the US Treasury announced a larger-than-expected increase to longer-dated bond issuance. NZ rates finally backed-up yesterday, with government bond yields rising by up to 10bps. The NZD has moved lower and sits this morning just around 0.6020. Finance Minister Robertson speaks at midday and he may provide some policy announcements ahead of the Budget next week.
US equity markets have made modest gains overnight. The S&P500 is up 0.1% while the NASDAQ is 1.2% higher. Investors continue to see tech firms as the likely “winners” out of the COVID-19 crisis, as more economic activity transitions online.
Investors are looking ahead to the easing of containment measures globally, allowing economies to return to some semblance of normality. Germany announced plans to reopen all shops from Wednesday and restaurants from Saturday and said the German football league could resume (behind closed doors) in the second-half of this month. Social distancing will remain in place until at least June and regional authorities will need to re-establish containment measures if new cases pick-up again. UK PM Johnson said he would outline the easing of some containment measures on Sunday, with these to take effect from the coming Monday.
There is still lingering concern among market participants about renewed US-China tensions. However, overnight, Secretary of State Pompeo backtracked a bit from his previous (unsubstantiated) claims that COVID-19 had originated in a Wuhan laboratory. He noted “the intelligence community’s still figuring out precisely where this virus began.”
Government bond yields have increased overnight and yield curves have steepened. The US Treasury announced larger bond auctions, with issuance skewed more towards longer maturities than the market had expected. It also confirmed that issuance of 20-year bonds would start from 20th May, the first time this part of the curve has been auctioned since 1986. The Treasury’s announcement caused a sizeable steepening of the US yield curve, with the 10-year yield rising 5bps, to a 3-week high of 0.71%, and the 30-year yield rising 8bps. Yields out to 5 years were unchanged.
European government bond yields rose in sympathy with the US and amidst concerns that the German Constitutional Court’s judgement earlier this week could constrain the ECB’s QE bond buying programme. The German 10-year yield rose 7bps to -0.51% while Italy’s 10-year rose 11bps, to almost 2%. French Central Bank Governor Villeroy tried to calm market concerns, saying the European Court of Justice had already decided that the ECB’s bond buying was proportionate and that the central bank would be as “flexible” and “innovative” as necessary to meet its inflation target.
NZ government bond yields finally backed-up yesterday, with the 10-year yield rising 9bps to 0.82%. The RBNZ’s buyback of government bonds finally met some aggressive selling (admittedly, at very low yield levels) and the market now awaits $1.05b of bond supply from New Zealand Debt Management today. The 10-year swap rate rose 6bps yesterday to 0.77%. NZ rates remain at extraordinarily low levels, even after the correction yesterday.
The USD is broadly stronger overnight (BBDXY +0.4%), albeit it remains firmly contained within its range from the past eight weeks. The ADP employment report was as bad as feared, showing a loss of more than 20 million US jobs in April. The official employment report is expected to show a similar amount of job losses on Friday.
Currency market movements reflect a more cautious risk backdrop than equity markets. The JPY has outperformed overnight (+0.5%), despite US bond yields increasing, while risk-sensitive currencies have fallen (NZD -0.5% to 0.6020 and AUD -0.2% to 0.6415).
The RBNZ released a note yesterday estimating the direct effect of COVID-19 containment measures on the economy. The RBNZ estimates that GDP is about 37% lower under Level 4 than it would be without any restrictions. The respective figures for Levels 3, 2 and 1 are 19%, 8.8%, and 3.8% respectively (i.e. GDP would still be almost 4% lower under Level 1 than it would be without any restrictions). We now wait for next Wednesday’s RBNZ MPS for what the policy response is. We expect a large increase in the RBNZ’s QE bond buying programme.
The market paid no attention to the release of the quarterly NZ employment report yesterday. The unemployment rate was at a low 4.2% in the March quarter and employment growth was strong, but this of course predates the nationwide lockdown. We look for the unemployment rate to rise to “just” 6% in Q2 (with the government’s wage subsidy scheme preventing a lot of job losses) before rising to around 10% by the end of the year.
New Zealand Finance Minister Robertson gives his pre-Budget address at midday today and we will be listening out for the pre-release of any policy announcements.
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1 Comments
I wonder if Fletcher Construction will feature in the Budget announcements at all...I see the 'midas touch' that lot has become famous is still highly effective....in the recent stoush with Electrix contracting...sounds like a nightmare onsite! Where are they getting their leadership teams from...Madagascar The Musical?
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