US equities recover from post-FOMC minutes sell-off. Global rates fall again, NZ rates hit new lows. NZD falls toward 0.65, underperforms significantly

It has been a night of mixed market moves.  US equity markets have mostly recovered their post-FOMC minutes sell-off, led by tech stocks.  In contrast, global bond yields have pushed lower.  The USD is generally weaker, but the NZD has significantly underperformed and is trading back towards 0.65.  NZ rates continue to hit new lows.

In the FOMC minutes yesterday morning, a number of officials thought the Fed should adjust its forward guidance “at some point”, denting market expectations of such a change at the upcoming September meeting.  Market participants have been expecting Fed to change its guidance to formally endorse a period of above-target inflation.  The FOMC minutes, which were perceived as ‘hawkish’ relative to expectations triggered a sell-off in equity markets that extended through the Asian trading session yesterday.  But, US equity markets have recovered overnight, with the S&P500 up more than 1% from the intraday lows implied by futures markets.  The S&P500 is now about 0.3% higher on the day and remains close to its record high.

Big tech stocks continue to drive the market, with the NASDAQ up 0.9%, while smaller cap stocks, which are more representative of the underlying US economy, have underperformed.  The Russell 2000 index of smaller cap stocks is down 0.4%.

News that Chinese and US administration officials were going to review the Phase-One trade deal “soon”, supported market sentiment.  The scheduled six-month review was originally due to take place over the weekend, but was called off at the last minute.  The news should reinforce market conviction that the Phase-One trade deal will remain intact despite ongoing tensions in other areas, with neither side incentivised to derail their economic recoveries.

In economic data, US jobless claims unexpected rose back above 1 million last week.  The trend still looks to be heading lower, but the numbers of those receiving benefits remains very high and the path to recovery is likely to be bumpy.  The Philadelphia Fed business survey was also a touch weaker than expected.

Global rates have pushed a bit lower overnight.  The US 10-year Treasury yield initially jumped to 0.68% immediately after the more ‘hawkish’ FOMC minutes, but it has reversed course overnight and is trading back at 0.64%.  Market-implied inflation expectations have fallen for the second day running, with the US 10-year ‘breakeven inflation’ rate down 4bps to 1.63%.  US 10-year inflation expectations have risen more than 100bps from their crisis-induced lows, but the lack of a clear signal from the FOMC minutes that the Fed will shift its forward guidance in September and a very weak auction of 30-year US inflation-protected bonds overnight have stalled that move.

In currency markets, the NZD is the clear outlier, falling 0.5% on a day when the USD has weakened against most other currencies.  There hasn’t been an obvious catalyst for the NZD underperformance overnight although we suspect the market is continuing to digest the RBNZ’s signals that it intends to take the OCR negative next year.  The NZD fell below 0.65 overnight and have recovered slightly to around 0.6525 this morning.  The NZD/AUD cross is back near two-year lows, at around 0.9075, while the NZD/EUR and NZD/GBP crosses are at three-month lows, at around 0.55 and 0.4940 respectively.

The GBP has been the main outperformer overnight, although again for no obvious reason.  The GBP is up 0.9% to above 1.32, near its highest levels of the year.  Brexit negotiations have yet to generate a breakthrough although it’s possible investors are turning more positive on the possibility of a deal to avert a hard Brexit.  Other currencies, with the exception of the Swiss franc, are +/- 0.3% against the USD over the past 24 hours.

The Bloomberg USD index is down 0.2% overnight, partially retracing some of its post-FOMC minutes gains.  The USD index remains near a two-year low.

In Europe, COVID-19 cases continue to rise, with the one-week change in new cases reaching its highest since early May.  The renewed spread of the virus in Europe, albeit nothing like the sharp rise seen earlier in the year, highlights the challenge of safely reopening economies.  French President Macron ruled out another lockdown and said the country would use more targeted measures to control its spread.  In the US, the growth in new cases is trending lower.

The grind lower in NZ rates continued yesterday, with a further 2bp fall in the 2 and 10-year swap rates, to 0.075% and 0.54% respectively.  The market prices the trough in the OCR at around -0.17% for mid-2021 and we think there is plenty of room for the market to increase rate cut expectations further over the coming months.  There is an RBNZ bond buying operation and a government bond tender today, but the focus is on the RBNZ’s 2pm announcement on its bond buying plans for the week ahead.  At the August MPS, the RBNZ said it would frontload its QE bond purchases to push interest rates lower, signalling a shift to a more tactical approach to setting the weekly purchase pace.  Next week there is a planned syndicated tap of the Apr-2027 New Zealand government bond.  Outside the government bond market, local credit spreads continue their relentless grind tighter amidst an ongoing hunt for yield among investors.

Yesterday, the Finance Minister announced a broadening of the eligibility criteria for the Business Finance Guarantee Scheme.  The government covers 80% of any losses on loans made by banks under the scheme.   Take-up has been minimal since the scheme was launched in March, so the government is increasing the maximum loan size from $500k to $5m, allowing larger firms to participate, and increasing the maximum term of loans from three to five years, among other changes.  Relatedly, the RBNZ said it would extend the term of its Term Lending Facility, where it offers banks long-term funding at the OCR for loans made under the government’s scheme, from three years to five years.  This term lending facility is different from the RBNZ’s proposed Funding-for-Lending scheme, which it is likely to be rolled out in conjunction with a negative OCR next year.

In the session, ahead RBNZ Chief Economist Yuong Ha and external MPC member Bob Buckle are hosting a post-MPS explainer by livestream at midday.  The European PMIs are released tonight, with the market expecting modest further improvement.