It was a reasonably quiet end to the week for markets. Reports that a scheduled review of the US-China Phase-One trade deal had been delayed didn’t hurt sentiment. The NZD underperformed on Friday and was the weakest currency last week. The Prime Minister announces at 10am whether the election goes ahead as originally scheduled, on September 19th, or is delayed.
Market moves were reasonably subdued on Friday. US equities markets were little changed, with both the S&P500 and NASDAQ consolidating near record highs. Likewise, the 10-year US Treasury yield fell just 1bp, to 0.71%, although that still left it 15bps higher on the week. Currency movements were limited to +/- 0.3% against the USD.
US-China tensions remain in the headlines although they haven’t had much impact on risk asset prices to this point. On Friday, Reuters reported that a scheduled review of the Phase-One trade deal between the US and China, due to talk place over the weekend, had been postponed indefinitely. The postponement is reportedly related to scheduling issue and to give China more time to increase its purchase of US agricultural goods, which are way behind schedule. There is no suggestion that the Phase-One deal is in jeopardy. Over the weekend, Trump ordered that Chinese-owned ByteDance sell its video-sharing app Tik Tok within 90 days, effectively putting a deadline for those US firms lining up to buy it. Separately, the Commerce Department said it was ending a temporary waiver for US firms to do business with Huawei, requiring those firms to apply for licences. Trump also hinted that he is looking at taking action against other Chinese tech giants, such as Alibaba, and the risk for the market is he ratchets up tensions further into November’s election.
European equity markets fell 1-2% on Friday on concerns about a second COVID-19 wave in the region. The UK said travellers from France and Holland, as well as certain other countries, would need to self-quarantine for 14 days from Saturday amidst a pick-up in COVID-19 cases. France threatened “reciprocal measures”.
In economic data, US core retail sales was stronger than expected in July, with positive revisions to prior months. Retail sales is now back above pre-COVID levels in the US. There remain question marks over the strength of the recovery from here, with US politicians yet to agree on a new fiscal support package.
The USD was generally weaker on Friday (BBDXY -0.2%) and it remains near a two-year low. Record low US real interest rates, positivity towards the euro on the back of the historic EU Recovery Fund, and generally positive risk appetite are all weighing on the USD. The BBDXY fell 0.4% last week. Speculative investors increased their short positions in the USD last week according to the CFTC; the net short USD position in futures held by speculators is now its biggest since mid-2018.
The NZD underperformed on Friday, falling 0.1% to about 0.6540. The NZD was also the weakest of the G10 currencies last week (-1%), in part due to the dovish RBNZ MPS which reignited market expectations for a negative OCR next year. The NZD/AUD cross has continued to drift lower and, at around 0.9125, is at its lowest level since October 2018. The contrast between the RBNZ and RBA is stark, with Governor Lowe on Friday reiterating that the negative interest rates are “extraordinarily unlikely” for Australia, although he didn’t rule out a quantity-based QE bond buying programme in the future. The NZD/GBP cross fell below 0.5 for the first time since May.
NZ swap rates increased 3bps to 5bps on Friday, in a curve steepening move, tracking similar moves in offshore markets the preceding night. NZ long-term swap rates had hit all-time lows on Thursday as the market ramped up expectations of a negative OCR next year and braced itself for frontloaded RBNZ bond buying. RBNZ government bond purchases will be $1.09b this week, above last week’s $940m pace and greater than the $950m of tender issuance. NZ inflation-indexed bonds again outperformed their nominal counterparts on Friday, with the 10-year ‘breakeven inflation’ rate rising another 10bps, albeit to a still-low 1.1%.
After the market close on Friday, the government announced that Auckland would remain in Alert Level 3 and the rest of the country at Alert Level 2 until 26 August. As a back-of-the-envelope calculation, these restrictions would take about 1.2% off total GDP. The government will review the settings on Friday. Finance Minister Robertson also announced that the wage subsidy scheme would be extended (and covering the entire country, not just Auckland), with further details to be released today.
The Prime Minister will announce at 10am whether the election will go ahead as originally scheduled, on September 19th, or is delayed. If the election is delayed, the Pre-Election Economic and Fiscal Update, which needs to take place between 20 to 30 days prior to the election, will be pushed back from Thursday. The bond programme was due to be updated on Thursday but this will also likely be pushed back, in the event that the election is delayed.
In terms of the week ahead, the FOMC minutes are released on Thursday morning, and these might contain further clues about potential policy changes at the upcoming meeting in September. The European PMIs are released on Friday. Locally, there is only second-tier data while RBNZ Chief Economist Yuong Ha and external MPC member Bob Buckle will have a livestream regarding the August MPS on Friday.
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In economic data, US core retail sales was stronger than expected in July, with positive revisions to prior months. Retail sales is now back above pre-COVID levels in the US.
Imagine you are locked in your home and can only go outside of it to purchase the bare necessities (this would’ve sounded ridiculous in every year before 2019). For simplicity’s sake, let’s assume that you normally spend $100 every month, half of that on the basics. Thus, for the month preceding this lockdown you’d have laid out the full hundred and then just fifty for the first month under restriction as well as each one thereafter.
Assuming the shutdown was limited to two months, that would have meant you spent $100 total instead of the usual $200 for both. If you haven’t lost your job, this leaves you with an extra $100 in cash; and even if you had become unemployed, in our example we’ll make it up from the federal government’s generosity.
What is your spending the first month when everything goes back to normal? Assuming no second order effects, that Jay Powell did his job (stop laughing), it would be the usual $100 plus the $100 of purchases you had foregone for these non-economic reasons during the prior two months: $100, $50, $50, $200.
In other words, the $100 that you didn’t spend during the lockdown doesn’t just disappear forever. As soon as you’re able, you’re going to put that money where you would have had you been “allowed.” If instead the four-month progression went: $100, $50, $50, $110, we wouldn’t be ecstatic about the “extra” $10 that’s spent in Month 4, we’d be furiously concerned about where the other $90 went.
If you decided to save that $90, then that’s a procyclical, positive (meaning bad) feedback which spells trouble for the months ahead (especially if you are far from the only one who did this). If you simply don’t have that $90 because you didn’t have any income and the feds didn’t make up everything that you lost, also positive feedback.
With only non-economic factors involved, those four months of spending would add up to the full $400 no matter in what order; that’s the “V.” Anything less than $400 means an economic hole has been opened up, sending interested observers off to figure out why. Link
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