S&P500 makes a new all-time high, before slipping back. Global rates head higher again but not in NZ with time lows in the NZ 10-yr swap rate as market digests the RBNZ MPS

Overseas market moves have been reasonably subdued overnight.  Global rates have continued to push higher while the S&P500 made an all-time high, before falling back.  Despite global moves, NZ rates experienced another chunky fall yesterday as the market continues to digest the dovish RBNZ MPS.  The NZD has fallen over the past 24 hours and is back near its post-RBNZ lows.

There hasn’t been much fresh news overnight offshore.  US jobless claims fell below 1 million for the first time since mid-March, pointing to a continued recovery in the US labour market (although the level of jobless claims remains very high, above that seen after the GFC).  There is still no breakthrough in sight in negotiations between Democrats and Republicans but the market is trading like a new fiscal package will eventually be agreed.  The rate of new COVID-19 cases continues to trend lower in the US, albeit from very high levels.

The S&P500 made an all-time high overnight, a landmark moment after it tumbled more than 35% in February and March.  It has given up those gains over the past few hours and is now down 0.5% on the day.  The NASDAQ is flat on the day.

Global rates have continued to track higher, with the US 10-year Treasury yield hitting its highest level in almost 8 weeks, at 0.72%.  This morning’s record $26b auction of 30-year bonds came 2.4bps above pre-auction secondary market levels, helping to drive a steepening in the yield curve (5y +1bps, 10y +3bps, 30y +6bps).  Market-implied inflation expectations also continue to push higher, with the 10-year ‘breakeven inflation’ rate reaching its highest level since January, at almost 1.7%.  Market-based inflation expectations remain low in absolute terms but the trend higher is one to watch.

Despite the 15bp rise in US Treasury rates this week, the NZ rates market has been in a world of its own the past two days, with the market continuing to digest the implications of the dovish RBNZ MPS.   The market added to OCR rate cut expectations yesterday, with the terminal OCR now priced at -0.13%.  The 10-year swap rate fell 6bps to a new all-time low of 0.57%.

The moves in government bond yields were even more pronounced, with a 9bp parallel move lower across the nominal bond curve and real yields falling by 10-13bps.  Yesterday’s tender of government bonds was very strong, with high bid-to-cover ratios and at yields 2-3bps below prevailing secondary market levels.  The 10-year NZ government bond yield, at 0.64%, is now trading more than 30bps below the Australian equivalent and below that of the 10-year US Treasury bond.  The RBNZ’s threat of frontloading bond buying will weigh on government bond yields in the near-term.

There has been the usual flurry of media interviews with senior RBNZ officials post-MPS.  RBNZ Chief Economist Yuong Ha reiterated that the Bank was actively seeking to drive bond yields lower with its frontloaded purchases.  On the possibility of negative rates, which the MPS set out as the likely next policy step if required, Ha said it was dependent on the economic outlook, adding “it’s conditional.  It’s not inevitable.”  Ha said the Bank would prefer a lower exchange rate but acknowledged that they were limited in how much they could influence it.

The NZD has fallen over the past 24 hours and is now trading close to its post-RBNZ lows, at around 0.6545 (-0.5%).  The NZD has also underperformed on the crosses, with the NZD/AUD reaching a fresh 18-month low overnight (it is currently around 0.9160).  The Australian employment report showed a larger-than-expected increase in jobs in July although this largely predates the Victorian lockdown.

The USD is generally weaker, albeit only modestly.  The Bloomberg USD index is 0.1% lower on the day, as it consolidates near its lowest level since mid-2018.  Outside the NZD (and NOK), currency moves have been restricted to +/-0.2% against the USD.

We await the NZ government’s announcement at 5:30pm today on whether the Auckland lockdown, due to end at midnight tonight, will be extended and broadened to other regions.  There were 13 new cases of COVID-19 in Auckland reported yesterday and the odds are very high the lockdown will be extended.  In economic data, the NZ PMI is released this morning although the market won’t pay any attention as it predates the re-emergence of COVID-19 in NZ and Auckland lockdown.  Offshore, there are Chinese activity indicators released this afternoon and US retail sales tonight.