Market sentiment remains positive, with equity markets have extended their gains from yesterday while global rates have moved higher and curves steeper. The USD is broadly stronger after a much better-than-expected retail sales release although most currency moves have been modest. Yesterday, New Zealand Debt Management raised a huge $7b via its May-2024 bond syndication, a record amount for a New Zealand deal.
There has been a lot to digest over the past 24 hours with markets focusing more on the positive news. The S&P500 is up 1.5% overnight and more than 6% above its intraday low reached yesterday morning, before the Fed announced that it would start its corporate bond buying. European equity markets rose between 3 to 4% overnight while the Nikkei rose 4.5% yesterday. Global rates have moved higher, and curves steeper, reflecting the risk-on mood and the prospect of more US fiscal stimulus (see below). The 10-year Treasury yield is 3bps higher, at 0.75%, while the 30-year yield is 7bps higher, to 1.53%.
US retail sales was much better than expected in May, bouncing back after the lockdown-enduced falls in March and April. Total retail sales rose a record 17.7% in May with large increases (from a low base) in categories such as clothing and furniture. Retail sales excluding food services (i.e. spending in restaurants) remains 3.7% below its January peak, but the data gives hope to those looking for a sharp recovery in the economy as it reopens. Besides the easing of restrictions in some states, US retail spending has been supported by enhanced US unemployment insurance – which is scheduled to expire at the end of the month – and the US government’s stimulus, which included cheques sent directly to households. The commonly-followed Citi US economic surprise index is at a record high.
Market sentiment had earlier been buoyed by a Bloomberg report yesterday afternoon that the Trump administration was considering a $1 trillion infrastructure package (~5%/GDP). Given Democrats have already put forward their own $500b infrastructure proposal, markets hope there is enough common ground between the parties (and bickering ahead of the election can be put to one side) to see a bill enacted.
There was also positive news in the form of an Oxford University study that found a cheap, existing drug (dexamethasone) had shown it could reduce COVID-19 deaths for those seriously ill. The drug retails for just £5 and the researchers found it cut the risk of death for those on ventilators by a third and for those on oxygen by a fifth. The UK’s chief medical officer hailed the result as “the most important trial result for Covid-19 so far”.
The rally in equity markets overnight was only briefly interrupted by news that COVID-19 cases continue to climb in certain US states, including Florida and Texas. The city of Beijing also raised its COVID alert level to its second highest level after the recent emergence of new cases linked to a food market. The authorities said, amongst other measures, schools would close and certain areas of the city would have restricted access. The risk of new COVID-19 outbreak would put the Chinese economic recovery at risk, but the markets hope that the authorities can quickly contain the spread without needing to implement more draconian lockdown measures.
There wasn’t much new from Fed Chair Powell’s testimony to the Senate. While acknowledging that “some indicators have pointed to a stabilisation and in some areas a modest rebound in economic activity” he cautioned that the economy was still well away from where it was pre-COVID and there was significant uncertainty about the shape of the recovery. Powell said the Fed was at an “early stage” in thinking about the possibility of applying Yield Curve Control in the US (whereby the central bank targets a longer-term interest rate, such as the RBA and BoJ have in operation). On its corporate bond buying, Powell said the Fed would adjust its purchases to market conditions, so purchases would be increased in stressed markets and reduced when credit markets are stronger.
The USD has strengthened over the past 24 hours, aided by the upside surprise to US retail sales, although the moves have been reasonably modest. The Bloomberg USD index (BBDXY) is 0.2% higher on the day, although it is still well below where it was a month ago. Safe haven currencies have outperformed, despite the rise in equity markets overnight, with the JPY and Swiss franc near unchanged against the USD.
The NZD and AUD are both 0.5% lower over the past 24 hours. The moves in the NZD and AUD overnight is a break from the recent (tight) correlation between these currencies and equity market movements which has been in place since the crisis kicked off. The emergence of new COVID-19 cases in Beijing, and the risk of an interruption to the Chinese economic recovery, may have weighed on the NZD and AUD, although the moves overnight were similar to the EUR. The NZD trades this morning at 0.6440.
There was a modest rise in the Global Dairy Trade index overnight (+1.9%), supporting the notion that prices have begun to stabilise over the past few months. There was no market reaction to yesterday’s news that there were two new COVID-19 cases in NZ, related to travellers from the UK. The government has said it will tighten protocols around quarantine and testing for incoming travellers.
The NZ curve steepened markedly yesterday, following the increase in global rates (which took long-end government bond yields higher) and the hugely successful May-2024 NZ government bond syndication (which took short-end yields lower). The Treasury raised an enormous $7b through the syndication, a record amount for NZ, and as large as the entire 2017/18 bond programme. The deal was heavily oversubscribed (the orderbook was over $14b), reflecting the backup in government bond yields in this part of the curve ahead of the deal and the new issue premium on offer to investors. 3-to-5 year government bond yields fell by 1-3bps on the day while 10-year yields rose 5bps. We think the steepening of the curve has further to run, especially with global curves moving this direction.
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