Tech stocks fall again, S&P500 flat on Friday. Little movement in currencies or US rates. Plenty on this week - NZ GDP, PREFU, FOMC and BoE meetings, RBA minutes, US retail sales

Equity markets were again volatile on Friday. The NASDAQ declined again, capping off a big fall for the week, while the S&P500 was unchanged.   Movements in currencies and bonds were more muted.  Over the weekend, AstraZeneca and Oxford University said they would resume Phase 3 vaccine trials in the UK, which should provide a welcome boost to risk assets to start the week.  The government makes its decision on the COVID-19 alert levels today.

Focus remains centred on equity markets, especially tech stocks.  The NASDAQ ended the week on a soft note, falling 0.6%, and leaving it with a 4.1% loss on the week (its biggest weekly fall since March).  The S&P500 fared better, rising 0.1% on Friday, but it was still down 2.5% on the week.  Sentiment remains fickle and intraday volatility very high, with NASDAQ futures traversing a 3.7% trading range on Friday and S&P500 futures 2%.  Investor confidence in the seemingly unstoppable rise in big tech firms appears to have been shaken by the big sell-off the past two weeks.

There are still plenty of risk events that could unsettle markets over the coming months, including the US election, the rising risk of a no deal Brexit and a possible slowdown in US growth amidst the fiscal stalemate.  On a more positive note, AstraZeneca and Oxford University announced over the weekend that their recent paused phase 3 trials for their experimental COVID-19 vaccine would resume in the UK, after gaining regulatory clearance (trials remain on hold, for now, in other countries).  The AstraZeneca/Oxford experiment vaccine is seen as one of global front-runners and news that its trials had been paused last week, after a participant fell ill, caused equity markets and rates to fall.  The weekend news should provide a boost to risk assets to start the week.

Outside of equities, there was less movement in other asset classes on Friday.  US Treasury yields declined slightly, with the 10-year rate falling 1bp to 0.67%.  There was little market reaction to the US CPI data, which was 0.1% above expectations on both a headline (+1.3%) and core (+1.7%) basis.  US inflation was boosted by a sharp rise in used car prices in August (+5.4%).  Demand for used cars has skyrocketed as people look to drive to work, rather than use public transport, but this should be a temporary influence on inflation rather than a permanent one, hence the limited market reaction.

The USD was slightly weaker, in index terms, on Friday (BBDXY -0.2%).  The GBP underperformed again (-0.1%) as investor concern about a ‘no deal Brexit’ continues to rise.  The GBP was the standout mover in currency markets last week, falling 3.6%.

A day after the ECB meeting, at which President Lagarde suggested that the ECB would not overreact to the appreciation in the EUR exchange rate, Chief Economist Philip Lane took a firmer line in a blog post.  Lane said that the ECB’s forecasts of core inflation would have been revised up by more had it not been for the appreciation in the EUR (which “significantly muted” the upward revision), adding that “it should be abundantly clear that there is no room for complacency ”.  The EUR rose 0.25% on Friday, to around 1.1850, with Lane’s comments having only a short-term effect on the currency.  Germany’s 10-year bund yield fell 5bps to -0.48%, although this was mainly a catch-up move to the rally in US Treasuries after the European close on Thursday night.

The NZD and AUD were both slightly stronger on Friday (+0.3% and +0.4% respectively), following the lead of the EUR.  The NZD fell 0.8% last week, underperforming other currencies except for the Brexit-troubled GBP and oil-sensitive CAD and NOK (Brent crude oil fell 6% last week).  The NZD/AUD cross drifted slightly lower, towards 0.9150.  We expect the cross to continue drifting lower over the remainder of the year, in part due to the outperformance of Australian commodities and the RBNZ’s more activist monetary policy approach.  This week should also reveal a far bigger hit to NZ GDP in Q2 than in Australia.  We have pencilled in a 13% decline in NZ Q2 GDP (consensus -12.5%, RBNZ -14.2%) compared to the 7% fall in Australia.

There were a number of second-tier domestic data releases on Friday, illustrating that the economy took a hit in August as the government re-imposed a lockdown in Auckland and greater restrictions in the rest of the country.  SEEK jobs ads fell 3.1% in August, the first fall since April, while Auckland job ads fell 11%.  Similarly, the Manufacturing PMI fell to 50.7 in August, from 59 in July, the second biggest one month decline since the survey started back in 2002.  In contrast, the housing market has been seemingly immune to the latest restrictions, with REINZ revealing annual house price inflation had accelerated to 10% in August (with the annualised rate of price growth over the past three months picking up to almost 20%).  At 1pm today, PM Ardern will announce whether the country will change COVID-19 alert levels (level 2.5 for Auckland and level 2 for the rest of the country), or remain there for longer.

It was a tale of two curves in the domestic rates market on Friday, with the swap curve flattening aggressively but the government bond curve steepening.  The 2-year swap rate increased 2bps on day, on profit-taking, while the 10-year swap rate fell 2.5bps.  In the bond market, sub 5-year NZGB yields fell by as much as 4bps while longer-dated yields were unchanged.  The bond market steepening followed the RBNZ’s QE buyback operation, at which the $150m 2025 buyback was barely covered while the $60m 2041 buyback saw a substantial volume of offers (indicating selling pressure in long-dated bonds).  The RBNZ kept its bond buying for this week unchanged, at $1.4b, although it has increased its planned purchases of longer maturity bonds, in response to the recent steepening.

For the week ahead, the NZ Pre-Election Economic and Fiscal Update (PREFU) and accompanying bond programme update are released on Wednesday.  We expect New Zealand Debt Management to keep its bond issuance forecasts unchanged at this time.

Offshore, the main focus is Thursday morning’s FOMC meeting, the first since Fed Chair Powell confirmed a shift to a ‘flexible average inflation targeting’ regime.   It’s possible the Fed could adopt firmer forward guidance (i.e. making future rate rises conditional on certain inflation outcomes), although a recent Bloomberg survey found that the majority of analysts think the Fed will refrain from doing so at this meeting.  The Bank of Japan and Bank of England also have policy meetings.  Neither central bank is expected to change policy although there will be more focus on what the BoE says given the increased chance of a no deal Brexit later this year.  The RBA minutes are also released and may show discussion on any further tweaks to policy the RBA is considering.

In terms of data, China reports its monthly batch of activity indicators on Tuesday.  Aggregate financing data, which was released last Friday, was much stronger than expected.  In Australia, our NAB colleagues forecast a 40k fall in employment, in line with consensus and unemployment to rise to 7.8%. Retail sales is the main data release in the US.  The domestic market focus is GDP on Thursday although, given the issues with measurement and the fact the data is now very dated, it’s unlikely to have a major market impact.