Global equities finish last week strongly as markets look through 20.5 million US job loss. US rates increase on speculation the Fed will push back against negative rates

Equity markets finished last week on a strong note, despite nonfarm payrolls revealing a record loss of US jobs in April.

US rates moved higher after the Fed said that Chair Powell will make a speech this week – markets expect Powell to push back on recent speculation that the Fed is considering negative interest rates. 

The NZD benefited from the risk-on backdrop, ending the week above 0.61.  It’s a big week in New Zealand ahead with the Government announcing today when the country will move to Covid Level 2, the RBNZ’s eagerly anticipated Monetary Policy Statement on Wednesday and the Budget on Thursday. 

Equity markets rose strongly again on Friday (S&P500: +1.7%, NASDAQ +1.6%), capping off a good week for risk assets.  Investors remain buoyed by the prospect of economies gradually reopening and the unprecedented stimulus from both central banks and governments.  Apple said it would start to reopen stores in the US this week, albeit in just a few cities at this stage, while New York Governor Andrew Cuomo said the state was “finally ahead of the virus”.  Spain loosens restrictions for around half the country from today (although not Madrid and Barcelona), with restaurants permitted to serve customers outdoors and non-essential retailers allowed to open their doors.  UK Prime Minister Boris Johnson announced a multi-level system for restrictions and said primary schools might begin reopening in June and some hospitality in July.   

The market largely looked through the monthly nonfarm payrolls release, which revealed a staggering 20.5 million job loss in April.  The scale of the job losses had been largely foreshadowed by the timelier weekly jobless claims series.  The leisure and hospitality industries accounted for around 8 million of the job losses, although the loss of jobs was broad-based across different sectors.  The unemployment rate rose to almost 15%, although the Bureau of Labor Statistics said it would have been around 20% had workers correctly classified themselves.  Average hourly earnings showed a very large rise, although this merely reflected compositional effects (lower-wage workers accounted for a disproportionate share of job losses) rather than any upward pressure on wages. 

On US-China trade, US Treasury Secretary Mnuchin and Trade Representative Lighthizer spoke with Chinese Vice Premier Liu on implementation of the Phase-One agreement.  A joint statement noted that “both countries fully expect to meet their obligations under the agreement in a timely manner”.  As part of the agreement, China has agreed to sizeable increases of US goods imports and it remains unclear whether it will be able to meet this commitment.  Trump later told Fox that he was “having a very hard time with China” and said his displeasure at China’s handling of the virus might override the trade deal. 

US rates moved higher on Friday, with the 2-year Treasury yield rising 2bps to 0.16% and the 10-year yield up 4bps to 0.68%.  The Fed announced that Chair Powell would deliver a speech on the economy on Wednesday night, which market participants speculate will push back against the notion that the Fed is considering negative interest rates.  Futures pricing for the Fed funds effective rate at the end of the year reached as low as -0.04% on Friday morning, but ended the day back in slightly positive territory, at 0.015%.  Separately, the Fed said that it would taper its US government bond buying under its QE programme for the week ahead from $8b per day to around $7b per day.  It also said it would taper its purchases of mortgage bonds from $6b to $5b per day. 

There are still no such signs of tapering from the RBNZ, which announced on Friday that it would purchase $1.35b of government bonds in the week ahead, the fourth consecutive week it has maintained this purchase pace.  The announcement triggered another sizeable move lower in New Zealand government bond yields (10 year: -7bps) and long-end swap rates.  The RBNZ continues to buy faster than New Zealand Debt Management is issuing the bonds, pushing NZ yields lower relative to other markets (the spread between NZ and US 2029 maturity bonds is now negative). 

Positive risk sentiment and commodity price gains (oil: +5%, copper: +1.5%) supported commodity currencies on Friday.  The NZD was the top-performing currency on the Friday session, rising 0.8% to around 0.6135, with the AUD sitting just behind on the current leader-board.  The CAD rose 0.4%, with the market paying little attention to the Canadian employment report which revealed, amongst other things, that almost 40% of Canada’s labour force worked less than half their usual hours, or not at all.  The JPY was the only currency to fall against the USD on the session (-0.4%). 

In the day ahead, the government will announce when the country will move to Covid Level 2.  The preliminary version of the ANZ business survey is also released, covering the start of May.  All eyes are centred on the RBNZ MPS on Wednesday and the Budget on Thursday. We look for the RBNZ to announce a big increase to its QE bond buying programme, from $30b to around $60b.  The market will be watching whether the RBNZ reiterates its previous commitment to keep the OCR at 0.25% until at least March, given recent speculation that it could cut the OCR to negative before the end of the year.  The government is set to announce new fiscal initiatives at the Budget and New Zealand Debt Management will update its bond programme for the coming four fiscal years, which will show a huge increase in forecast bond issuance compared to the Half-Year Economic and Fiscal Update (HYEFU) back in December.