US rates fall as Fed fund futures trade with (slightly) negative rates. Equity markets push higher. USD weakens, NZD up 1.2% overnight

Equity markets have had another good night overnight (S&P600 +1.2%).  The big news has been in the US rates market, where the market has, for the first time, started to price a negative Fed funds rate (-0.02% by the end of the year).  The USD has fallen broadly amidst the fall in US rates.   The NZD and AUD are up around 1.2% over the past 24 hours. 

We’ll start with the US rates market today.  Futures contracts on the Fed funds effective rate moved into negative territory for the first time overnight.  Futures pricing for the end of the year now stands at -0.02%, 7bps lower than the current level of the Fed funds effective rate (0.05%).  Fed policymakers have previously sounded resistant to the concept of negative rates, with Chair Powell saying in March “we do not see negative policy rates as likely to be an appropriate policy response here in the United States”.  But the market is, at face value, pricing in a chance the central bank might change its mind. 

There doesn’t appear to have been an obvious driver of the fall in US rate expectations overnight and technical factors may have contributed to the move.  Some have attributed the move, in part, to comments from high profile bond investor Jeffrey Gundlach who tweeted “the pressure to go negative on Fed Funds will build as short term borrowing explodes and dominates.  Please, no. Rates < 0 = Fatal." 

US Treasury yields fell as the market ratchetted up rate cut expectations.  The 2-year yield fell 5bps to 0.13% and the 5-year yield 8bps to 0.29%, both all-time lows.  The 10-year yield is still within its recent range and trades this morning at 0.63% (-8bps on the day).  NZ government bond yields fell by up to 4bps yesterday after a very strong tender of bonds from New Zealand Debt Management and they are likely to extend that move this morning on the back of the overnight moves.  The market is focused today on what the RBNZ announces for its QE bond buying for the week ahead (announcement at 2pm).  The RBNZ has kept its government bond buying at $1.35b for each of the past three weeks, exceeding the volume of issuance and driving yields lower. 

Equities have risen strongly overnight, with the three main US benchmarks gaining between 1% and 1.5% and European indices up by a similar amount.  Investors remain focused on the prospect of major economies gradually opening up over the coming months.  Biotech company Moderna also saw its share price rise more than 10% after it received regulatory approval to proceed with further trials on a possible COVID-19 vaccine.  It expects to undertake further (late-stage) trials by the early Northern Hemisphere summer. 

The positive sentiment was reinforced by reports that US Trade Representative Lighthizer and Chinese Vice Premier Liu would speak as soon as next week on implementation of the Phase-One US-China trade deal.  This provided some comfort to the market which had grown concerned about renewed tensions between the two countries over the origins of COVID-19 (Trump recently alluded to retaliation). 

The USD has experienced a broad-based fall over the past 24 hours amidst the increase in Fed rate cut expectations and more positive risk sentiment.  The BBDXY is 0.4% lower on the day, effectively reversing the move from yesterday.  It remains stuck in a range for now. 

Risk and growth-sensitive currencies have outperformed and safe-haven currencies underperformed.  The NZD and AUD have increased 1.2% and 1.4% respectively over the past 24 hours, supported by the rise in equity markets and an appreciation in the CNH (+0.4%).  The NZD trades this morning around 0.6080. 

Yesterday, Prime Minister Ardern set-out what the economy would look like under COVID Level 2.  Most of the economy will be able to return to semi-normality provided that social distancing is maintained.  It is almost certain the Government will announce May 11 a future move to Level 2, which we think will likely start on May 14 (with schools and tertiary institutions opening from May 18).  Ardern suggested the transition will occur in a staged fashion with higher risk activities (such as hospitality venues and domestic tourism facilities) the last to be permitted.

Earlier, Finance Minister Robertson gave little away in his pre-Budget speech though he did acknowledge that the Government’s accounts and economic forecasts will look simply awful.  The government will unveil the Budget next Thursday and New Zealand Debt Management will update its bond programme for the coming four fiscal years.  Bond issuance will be very high over the next few years to fund the government’s COVID-19 fiscal response.

The RBNZ’s survey of inflation expectations showed the 2-year ahead measure down to a record low of 1.24% in Q2 from 1.93% Q1.  This shouldn’t really be a surprise to anyone, and we expect a big policy response from both the RBNZ (via a sizeable increase to its QE bond buying programme) next week, as well as new fiscal measures from the government at the Budget.  The market wasn’t moved by the data release. 

In central bank news, the Bank of England refrained from adding more stimulus at its meeting overnight, in a 7-2 vote.  Analysts expect the BoE to upsize its QE programme over the next few months though, with the Bank set to reach its bond buying target as soon as July, if it carries on at its current pace.  The Bank said it expected growth to fall 3% in Q1 and 25% in Q2 but Governor Bailey struck a relatively upbeat tone, saying he expected activity to bounce back “much more rapidly than the pullback from the global financial crisis”.  The Bank said it expected “only limited scarring to the economy”.  Time will tell. 

ECB President Lagarde said the central bank was “undeterred” by the recent German Constitutional Court ruling, with threatens to constrain the ECB’s bond buying programme.  The German Constitutional Court has ordered the ECB to conduct a “proportionality assessment” of its bond buying programme and has threatened to stop the German central bank from participating.  But Lagarde struck a defiant tone, saying “we are an independent institution, answerable to the European Parliament…we will continue to do whatever is needed, whatever is necessary, to deliver on that mandate.”  The 10-year Italian bond yield fell 6bps overnight, to 1.91%. 

The Norges Bank surprised the market by cutting its cash rate from 0.25% to 0% overnight.  The Norges Bank said it didn’t envisage making further cuts.  Despite the surprise cut, the Norwegian krone has been the top performing currency over the past 24 hours, up almost 2%.  Oil prices rose earlier in the session after reports that Saudi Aramco had increased its pricing for oil to be delivered in June, but that move has since completely reversed.

In economic data, US weekly jobless claims rose 3.17 million, although this was lower than last week’s count and it appears to be trending down.  Nonfarm payrolls is tonight, with the market looking for a staggering 21.7 million job losses in April.  Elsewhere, China’s Caixin Services PMI rose by less than expected in April, remaining in contraction territory at a level of 44.4, well below the official services PMI (52.1).