The big news for NZ is that there has been COVID-19 community transmission and Auckland moves to a Level 3 lockdown today, initially for three days. The NZD has underperformed, but not significantly. Offshore, US Treasury yields have had a big move higher while the S&P500 has moved to within 1% of its all-time high.
The major news locally is that there has been COVID-19 community transmission in NZ, following the discovery of four cases in one Auckland household. Auckland moves to COVID Alert Level 3 from midday today for an initial three days, although the risk is clearly very high that this is extended. The remainder of the country moves to Level 2. Alert Level 3 means non-essential workers are encouraged to work from home, schools and childcare centres will close for all but essential workers and most gatherings of more than 10 people are not permitted. Alert Level 2 is less onerous, with gatherings of up to 100 people still permitted and restaurants and bars can stay open, albeit within social distancing guidelines.
From an economic perspective, the news is a blow. The economy had rebounded much quicker than expected following the move to Alert Level 1 at the start of June and the renewed lockdown in Auckland will dent that recovery. The economic impact will depend on, among other things, how long the lockdown lasts and whether the outbreak remains confined to Auckland (such that new restrictions aren’t required for the rest of the country). There will be press conferences today at 10:30am and 1pm.
The news of new COVID-19 cases in NZ comes just ahead of the RBNZ’s MPS this afternoon. Our call has been that the RBNZ would likely keep its bond buying limit unchanged, at $60b, for now. But the news overnight reinforces the still-fragile nature of the recovery and heightens the risk of dovish messaging from the Bank. There is a risk that the Bank decides to add stimulus today by increasing its bond buying limit.
The NZD has, unsurprisingly, underperformed over the past 24 hours but the moves so far have been reasonably modest. The NZD is down 0.2% against the USD, at around 0.6580. The NZD/AUD cross fell from 0.9230 to around 0.9180 around the time of the government’s announcement, but it has since retraced more than half that move and trades this morning around 0.9205 (-0.2% on the day).
Offshore, market sentiment remains positive, with investors seemingly expecting a new US fiscal package to be forthcoming despite the lack of progress in negotiations to date. Trump said he was “very seriously” looking into cutting the capital gains tax (likely by removing the inflation-indexation from the capital gains calculation), which would again circumvent Congress.
The trend in COVID-19 new cases and hospitalisations in the US remains downwards, providing hope that social distancing restrictions can be removed in time across affected states and the broader reopening process for the economy can continue. Russia became the first country to grant regulatory approval for a COVID-19 vaccine, despite only two months of trials.
The S&P500 is currently up 0.2%, bringing it to within around 0.7% of its all-time high, while European indices rose 2-3%. The rotation from tech stocks to value and smaller cap stocks continues, suggestive of greater market confidence in the economic recovery. The Russell 200 index of small cap stocks is up 0.8%, bringing its cumulative gain this month to almost 8%, while the NASDAQ is down 0.5%.
Global rates, which to this point have to been largely immune to signs of optimism in other asset markets, have had a decent move higher overnight. The 10-year Treasury yield has risen 8bps to 0.66%, its biggest one-day rise in over two months. The 10-year real yield on US inflation-protected securities is up a lesser 5bps, to -0.98%. US market-implied inflation expectations have fully recovered their losses from the crisis, with the 10-year ‘breakeven inflation’ rate up to 1.64% (still below levels consistent with the Fed’s current 2% target). The move higher in rates, albeit from what were ultra-low levels, and steepening of curves is consistent with signs of growing market confidence in the economic recovery. There is also a record $112b of Treasury bond supply this week for the market to digest (the Fed is currently buying $80b per month).
USD/JPY has been the big mover in FX markets, rising 0.7% to a 2½ week high of 106.65. The move higher in USD/JPY is consistent with the improvement in risk appetite (the Swiss franc has also underperformed) and the rise in US Treasury yields, which tend to be highly correlated to the currency pair. The USD regained earlier losses against other currencies as US Treasury yields moved higher. The EUR rose to above 1.18 in London trading, but has since reversed course and is back to near unchanged on the day, at around 1.1745. The AUD is unchanged from this time yesterday, around 0.7150..
The move higher in Treasury yields took precious metals lower, with the gold price falling over 5% to $1,924 and the silver price down over 12%.
NZ rates are likely to open up higher and the curve steeper this morning, following these overnight moves, although the reaction will likely be tempered by the upcoming RBNZ MPS. From a government bond issuance perspective, the fresh COVID-19 cases in NZ will likely increase the chances that Treasury keeps the unallocated $14b from the COVID recovery fund in the bond programme. New Zealand Debt Management refreshes the bond programme next Thursday, alongside the Pre-Election Economic and Fiscal Update.