Little movement in equities or currencies overnight. But global rates continue to grind lower. No US fiscal deal yet. Eyes on NZ employment data

There hasn’t been much movement overnight across equities and currencies.  Global bond yields, on the other hand, have continued to push lower, with the US 10-year rate hovering just above 0.5%.  There is still no breakthrough in negotiations over a new US fiscal stimulus package.  The NZ labour market report is released today.

There hasn’t been much news or economic data overnight and consequently equity and currency markets have shown little movement.  US equities have consolidated recent gains and are down only marginally on the day, with the NASDAQ close to its all-time high and the S&P500 less than 3% off its record high.

Negotiations are ongoing between Republicans, Democrats and the Trump administration on a new fiscal stimulus package but there hasn’t been a breakthrough yet.  Treasury Secretary Mnuchin said talks generated “a little bit of progress” while Democrat leader of the House Pelosi told Fox she didn’t expect a deal this week.  Enhanced unemployment benefits, which gave an extra $600 per week to claimants, expired last Friday and the two sides have failed to find a replacement solution.  Both sides agree that the government should send another round of cheques, worth $1,200, to certain US households, but the remain differences on other issues, like funding for state and local governments.  Failure to provide another fiscal stimulus would likely hit the US economy hard at a time when it already appears to be losing some momentum.

The popular video sharing app, Tik Tok, has become the latest firm caught in the crosshairs of US China tensions.  Late last week, Trump said he intended to stop Tik Tok operating in the US, owing to alleged data privacy concerns.  Microsoft is among firms reportedly seeking approval to purchae Tik Tok from its Chinese owners, ByteDance.  An editorial in the state-owned China Daily hit back yesterday, saying “China will by no means accept the ‘theft’ of a Chinese technology company, and it has plenty of ways to respond if the administration carries out its planned smash and grab.”  Tensions between the two countries continue to simmer away but the market assumes that there won’t be a major economic confrontation given both sides are dealing with the economic fallout from COVID-19.  US-China tensions are a secondary concern for the market at present.

Currency moves have been muted, with the Bloomberg USD index unchanged on the day.  The USD indices remain near two-year lows, with speculative positioning heavily short US dollars (and long the euro).

The AUD has been the top performer overnight, gaining 0.3%, to around 0.7150, while the NZD is little changed, at 0.6610.  The NZD/AUD cross has fallen to around 0.9240, a two-month low, despite the harsher lockdown recently imposed in Melbourne.  Separately, whole milk prices fell 7.5% at the fortnightly GlobalDairyTrade auction overnight while the broader price index declined 5%.  The fall in prices at this auction reverses around half the gains from the trough in May.

There weren’t too many surprises from the RBA’s monetary policy meeting yesterday, with the central bank keeping both its cash rate and 3-year yield target at 0.25%.  The RBA said it would buy Australian government bonds today to ensure the yield on 3-year bonds, which has been lingering marginally above 0.25%, remained consistent with its yield target.  The RBA’s forecasts indicate it is expecting similar outcomes to that in the May (a 6% decline in GDP in 2020 and a 5% rise in 2021), though presumably that is not as rosy as looked likely a few weeks ago, owing to the recent lockdown enforced in Victoria.

Global rates have continued their relentless grind lower, with the US 10-year Treasury yield falling 4bps to 0.51%.  That’s the lowest yield on record, except for one brief spike in March.  Fed officials continue to sound a very dovish tone.  San Francisco Fed President Daly observed that COVID-19 was going to be around for longer than previously hoped and said the Fed was “thinking about how can we use forward guidance to telegraph to people…what our intentions are in terms of supporting the economy going forward.”  There is intense speculation that the Fed will amend its forward guidance at the September meeting, moving to formally endorse a period of above-target inflation (to compensate for previous periods were inflation has undershot the 2% target).

In NZ, swap rates drifted a little higher yesterday (10-year swap +2bps to 0.66%) although those moves are expected to reverse this morning.  Longer-term NZ rates remain close to all-time lows.  Meanwhile, long-end swap spreads (the difference between the swap rate and government bond yield of the same maturity) continued their recent trend wider.  Swap spreads have widened by up to 15bps (i.e. government bond yields have fallen by more than swap rates) since the May-2041 syndication last month and are closing in on 0bps again at the 10-year maturity.  The two key upcoming events for the NZ rates market are the RBNZ MPS next week – where we think the most likely outcome is for the Bank to keep its bond buying limit unchanged, for now – and the bond programme update on August 20, where the risk is that this year’s issuance programme is reduced.

The NZ labour market report is released today, with the market looking for a rise in the unemployment rate to 5.6% and a 2% fall in employment in Q2.  Recent labour market indicators, including Stats NZ’s new monthly job market indicator – based off tax data – have been much better than feared (the RBNZ’s MPS forecast a 7% unemployment rate and a 4.5% fall in employment for the quarter).  That said, we are still wary about the outlook for the job market post the expiration of the government’s wage subsidy scheme.  Offshore, the market looks for a modest fall in the ISM services index (to 55), following the re-imposition of certain social distancing restrictions in numerous Southern and Western US states.