Equity markets have continued to push higher overnight on growing market optimism that the global economy has passed the turning point. The risk-on backdrop has led to a further fall in the USD. The NZD is back above 0.62 this morning.
It has been another good session for risk assets. US equity indices have added to gains from earlier in the week, with the S&P500 rising 0.7% and the NASDAQ 0.6%. The NASDAQ is now a mere 3.6% from its all-time high reached in late March, before the COVID-19 crisis kicked off.
For now, markets appear content to look through US-China tensions. Instead, the focus is on countries gradually reopening their economies and the prospect for an economic rebound over the remainder of the year.
The number of new US jobless claims rose 2.1 million last week and this figure continues to trend lower. Notably, there was a sharp fall in US continuing claims (almost 4 million people) last week, suggesting that businesses having started rehiring in the US. Continuing claims measure the number of Americans who continue to claim unemployment benefits. Pantheon Macroeconomics note that the fall in continuing claims last week was exaggerated because California’s numbers weren’t included (the state reports every other week) but, even so, it provides grounds for optimism that we have seen the peak in US unemployment.
High frequency data is telling a similar story. LinkedIn’s economist yesterday noted that hiring in China, based on its internal data, was now back to flat year-on-year, adding that “we seem to be through the worst of [the] hiring pullback” in the US. That said, unemployment rates are likely to remain uncomfortably high for quite a long time.
US-China tensions continue to bubble away. Yesterday, China’s National People’s Congress formally approved the draft national security law for Hong Kong. The market now awaits the US response, which could potentially include the US changing or revoking the ‘special status’ afforded to Hong Kong. Separately, the New York Times reported the US will expel Chinese students with ties to military schools. And, somewhat ominously, White House economic advisor Larry Kudlow said the Phase-One trade deal between the two countries was still on “for the moment.”
The USD has continued to fall amidst the risk-on backdrop. The Bloomberg USD index (BBDXY) is down 0.45% overnight, bringing its decline on the week to 1.3%. The BBDXY broke out of its previous trading range earlier this week and now trades at its lowest level since mid-March.
The EUR has broken decisively above 1.10 (+0.6%) and it now trades at a two-month high. Sentiment towards the EUR has been buoyed by the European Commission’s recent €750b recovery fund proposal, even though it still needs to win support from several sceptical Northern European countries. The Italian-German 10-year bond spread fell 7bps, to 184bps, its lowest level since late-March.
The NZD and AUD have both risen about 0.6% overnight, a similar-sized move to that of the EUR. The NZD and AUD remain highly correlated with equity market movements. The NZD trades this morning around 0.6220, near its highest level since mid-March.
In NZ economic data, the final version of the ANZ business survey improved slightly from the provisional results earlier in the month, likely due to the country moving to COVID Alert Level 2. Own activity expectations were -38.7 in May, up from April’s record low -55.1, but still lower than the trough reached during the GFC.
Separately, Stats NZ reported that filled jobs fell 1.7% in April (circa 37,500 people). This was the biggest fall in this series since the data started in 1999. While different concepts, this is not wildly out of line with the additional 30,000+ people claiming the government’s Jobseeker Support benefit in the month. Markets showed no reaction to either data release.
RBNZ Head of Financial System Policy and Analysis Toby Fiennes told Bloomberg yesterday that the RBNZ intends to go ahead with its plan to raise bank capital levels from next year “if things return to a reasonable state, something approaching normal, in the next few months.” Earlier this year, the RBNZ pushed back the implementation date for the higher capital requirements to July 2021. Fiennes said the RBNZ was unlikely to change its view on the minimum level of Tier 1 capital banks would need to hold, but he added that the current seven-year transition period to those higher capital levels could be extended if required.
There hasn’t been much movement in government bond yields overnight (except for the peripheral European countries). The US 10-year Treasury yield has nudged up 2bps to 0.7%, but it remains in an extremely tight trading range. Notably, US corporate bond issuance for 2020 passed the $1 trillion market for the year overnight, the fastest pace of issuance on record. US investment-grade corporate bond spreads are around 200bps tighter than the extreme levels reached in late March and are now close to their historical averages. Investor demand has returned to corporate bonds, with US credit funds receiving a record inflow of $13.8b last week.
There was also little change in NZ government bond yields and swap rates yesterday. The 10-year swap rate is 0.7% and the 10-year government bond yield 0.75%. The main focus today is on the RBNZ’s 2pm announcement on its plans for bond buying for the week ahead. The RBNZ slightly tapered its weekly purchase pace last week, from $1.35b to $1.175b.