Market likes flattening of US COVID19 case numbers and ISM data. Equities, USD and UST yields higher. NZD and AUD slightly underperform

Stocks have begun August on a positive note while the USD and US Treasuries have reversed course from the pressures seen last month, with the USD higher and the US 10-year rate also nudging higher. The NZD and AUD have slightly underperformed.

US stocks have begun the new month on a positive note, with the S&P500 currently up 0.9%, driven by the IT sector, with some spillover evident from big tech’s very strong earnings reports last week. Supporting the move has been less concern about US COVID19 cases numbers and stronger economic data.

The US reported some 47,000 new cases of COVID19, the smallest daily increase in almost four weeks. Rolling averages give a better indication of trends and those continue to suggest that the “curve” has flattened, with 7-day averages of case numbers and hospitalisation rates flat to slightly lower over the past couple of weeks.

Continuing the run of better than expected economic data, the US ISM manufacturing index rose to 54.2, its highest level since March 2019, driven by new orders and production. The employment index barely increased to 44.3 and, taken literally, suggests that firms are still shedding jobs. The final manufacturing PMI reading for the euro-area was revised 0.7 higher to 51.8 versus the flash estimate, suggesting further upward momentum through last month. 

Negotiations have continued this week on a US fiscal stimulus bill that needs to be agreed upon to support the economy. The $600 per week supplementary unemployment benefit expired at the end of last week. Trump still favours suspension of the payroll tax as a means of fiscal stimulus. The WSJ reports that the White House has talked about taking unilateral action if congressional talks on the relief package collapse. Trump allies argue that the President has the authority to suspend the payroll tax if he declares a national emergency. The market trades as though a fiscal stimulus bill will be imminently agreed. A fiscal cliff ensues, with negative economic consequences, otherwise.

US Treasury rates have pushed higher from the record low close set at the end of last week. The 10-year rate is up 3bps to 0.56%, with half of that coming after the NZ close. NZ rates barely moved yesterday, not helped by the NSW bank holiday. Swap rates were 1bp higher across the curve, while an offer tone was evident for NZGBs through the afternoon as the Australian 10-year future nudged lower in price.

In currency markets, the recovery in the USD on Friday night continued into Monday, with the BBDXY index up 0.3%. Despite the risk-on tone, the NZD and AUD have slightly under-performed, albeit with modest falls in the order of 0.3%. Both currencies are seasonally weak in August, with nine falls in the past ten years for the month. After tracking sideways through Asian trading, the NZD fell 50 pips or so to a low of 0.6575 overnight, before recovering to 0.6610. The AUD fell to 0.7077, and has recovered to 0.7120. This was a USD-led move, with other majors showing the same pattern. EUR is around 1.1755, down 0.2% for the day after dipping below 1.17. Small net moves are also evident for GBP and JPY.

We don’t see the news on the lockdown in Victoria as having an overtly negative impact on the AUD, even if it will see Australian GDP forecasts nudged lower. NZD/AUD remains at the bottom of the range seen over the past month, just under the 0.93. If the market was concerned about the outbreak of the virus in Victoria over recent weeks, the cross would have moved higher, not lower. There would likely be an impact on the cross if the virus outbreak spreads to NSW, but thankfully case numbers there still remain low.

The RBA will need to consider the lockdown in Victoria as it reassesses the policy outlook later this afternoon, but we don’t expect any change here.