US equities ended last week on a strong note, bolstered by impressive earnings reports from some of the big tech firms. The USD recovered on Friday, but still recorded its biggest monthly fall since January 2018. The NZD fell about 1% to 0.6630 while NZ long-term wholesale fixed rates closed in on record lows. There is still no sign of a breakthrough in negotiations over an extension to the enhanced US unemployment benefits, which expired on Friday, which may see risk assets open lower this morning.
The USD finally found some support on Friday, with the Bloomberg DXY rebounding from what was its lowest level in more than two years. The BBDXY rose 0.4% on Friday, with the EUR and JPY falling 0.6% (to 1.1780) and 1% (to 105.80) respectively. These moves were mirrored in the NZD. The NZD initially broke above 0.67 for the first time since January before turning sharply lower, finishing the week around 0.6630.
There wasn’t an obvious catalyst for the turnaround in the USD on Friday although, after its recent big move lower, it was probably due for a pullback. July was a terrible month for the USD, with the BBDXY falling 3.3% and the EUR rising almost 5%, its biggest monthly gain since late 2010, buoyed by the €750b EU Recovery Fund. The NZD gained 2.7% last month.
The AUD also fell 0.7% on Friday, to around 0.7140. It is likely to face further downward pressure this morning after Victoria’s Premier announced yesterday that Melbourne will now be put under an 8pm – 5am curfew for 6 weeks, until 13 September, with rules tightened around people leaving home. The extended lockdown will further hit Australian growth forecasts.
One of the factors weighing on the USD (albeit not so much on Friday) has been the steady decline in US real (inflation-adjusted) interest rates. The 10-year US real rate fell to an all-time low on Friday, breaking below -1% for the first time. Nominal interest rates were little changed (the US 10-year rate continues to sit just above 0.5%), with the latest decline in real rates more to do with rising market-implied inflation expectations. The Fed is expected to alter its forward guidance, possibly as soon as its next meeting in September, to communicate a willingness to accept a period of above-target inflation. Credit rating agency Fitch put its AAA rating on the US government on negative outlook late in the session, due to the deterioration in the fiscal outlook, but there was little market reaction.
Equity markets had a good session on Friday, albeit mainly due to a handful of big tech firms. The S&P500 rose 0.8% and the NASDAQ 1.5%, with both trading near their recent highs. Apple’s share price rose more than 10% after reporting stronger than expected earnings, with revenues rising 11% from a year ago against analyst expectations for a decline. Facebook and Amazon’s share prices rose 8% and 4% respectively after also posting stronger-than-expected results. The outsized influence of the big tech firms is apparent from the fact an equally-weighted version of the S&P500 was slightly down on Friday. Meanwhile, the Russell 2000 index of small cap stocks, arguably more representative of the US economy than the now tech-heavy S&P500, fell 1%. Besides the continued outperformance of big tech, ultra-low interest rates and expectations of continued monetary policy support remain important drivers behind the resilience of the S&P500 in the face of continued high COVID-19 readings in the US.
There is still no agreement between Republicans and Democrats on a solution to replace the enhanced US unemployment benefits, which expired on Friday. Around 30 million Americans have been receiving $600 extra per week in unemployment benefit payments, almost double the pre-COVID average payment across the country. After a weekend meeting with senior Democrats, Treasury Secretary Mnuchin said there was “still a lot of work to do” to find a compromise agreement, although the talks were described as productive. In the absence of some form of replacement income support, the expiration of the enhanced benefits risks harming the US recovery, which was already showing signs of losing momentum. The Senate is due to go into recess on Friday and the lack of breakthrough over the weekend could see risk assets open lower this morning.
There was plenty of economic data released on Friday, but to little market reaction. Eurozone Q2 GDP fell more than 12%, in-line with economist expectations, led by an 18.5% fall in Spanish GDP. Higher frequency data, like the PMIs suggest the region has returned to growth, although the recent pick-up in COVID-19 cases in several countries is a risk for the outlook. Spain reported over 3,000 new cases on Saturday, its most since mid-April. Meanwhile, in the UK, the government announced that it was banning separate households in the parts of Northern England from visiting each other, to contain the spread of the virus, and there have been reports the government is considering sealing off Greater London from the rest of the country.
NZ rates experienced their biggest moves in some time on Friday, with the 10-year swap rate falling to a near-record low of 0.62%. The 5bp fall in the 10-year swap rate was the biggest one-day move in more than 6 weeks and comes after a period of exceptionally low volatility. Long-end government bonds outperformed, with yields falling by as much as 7bps on the 2041 bond amidst broader flattening pressure on global curves and month-end related demand. We don’t think long-term swap rates realistically have that much further to fall from these already ultra-low levels, absent major central banks changing their stance on negative interest rates.
It’s a data heavy week ahead. Locally, the Household Labour Force Survey (HLFS) is released on Wednesday. We are looking for a 2.1% decline in employment in Q2 and an increase in the unemployment rate from 4.2% to 5.9% (vs. the RBNZ’s May MPS forecasts of -4.5% and 7% respectively). Recent NZ labour market data, including Stats NZ’s new filled jobs series (based on tax data), has been more positive although we remain wary about how the job market will fare after the government’s wage subsidy scheme rolls off. The RBNZ’s 2-year ahead inflation expectations measure, which fell to an all-time low of 1.24% last quarter, is released Thursday.
Offshore, the US ISM surveys are released (the focus will likely be on the non-manufacturing version) and payrolls is on Friday. The median analyst expectation is that the US created 1.578m new jobs in July and for the unemployment rate to drop from 11.1% to 10.5%. More recent readings on initial and continuing jobless claims suggest that August is likely to be a weaker result.