The recovery in global equities this week has seen some follow-through overnight, with stronger than expected Chinese economic data yesterday adding to the positive vibe. Currency movements have been modest, with the NZD and AUD modestly higher for the day, but with no follow-through in overnight price action. GBP has recovered a little further.
US equities have recovered further from their two-week malaise, led by big tech, with the S&P500 currently up 0.7% and the Nasdaq index up around 1½%. There has been little overnight news to drive markets. Slightly weaker than expected US industrial production data for August was largely ignored. The WTO ruled that the US violated trade rules with its tariffs imposed on China from 2018. The ruling is of academic interest only, as the US can appeal the decision and continue with tariffs regardless, as the US has refused to appoint new members to the appellate body.
The market awaits the next Fed policy update due in less than 24 hours. The statement and messaging at Chair Powell’s press conference will no doubt reinforce the outlook for lower-for-longer interest rates as the central bank seeks to achieve above-2% target inflation in the years to come. While no changes in policy are expected, new projections will be released and there is half a chance that forward guidance on low rates could be solidified at this meeting. Chair Powell will be grilled on the Fed’s new strategy of “average” inflation targeting and how this has changed the policy outlook.
Chinese activity data released yesterday has had an impact on positive market sentiment. The data for August were stronger than expected across the board, showing that the recovery had picked up pace. Annual retail sales growth (+0.5%) continued to lag industrial production (+5.6%) – the latter boosted by government policies – but at least sales showed the first positive growth since December, even if only in nominal terms.
Ahead of that data, the RBA minutes of the September Board meeting reiterated the Bank’s easing bias, but didn’t reveal any hints about timing, or that the Bank was considering to target lower rates across the yield curve beyond three years as a means of further easing, along the lines of the AFR article earlier in the week.
The RBA minutes and China data had an impact on currencies. CNH reached its strongest level since May 2019, with USD/CNH down 0.4% for the day to 6.78. The AUD was softer heading into the release of the minutes but bounced higher given the less-dovish message and it made further gains after the Chinese data. The AUD pushed up as high as 0.7343 overnight, but has since retreated to the 0.73 mark, now only up modestly for the day and a little weaker from the NZD close.
The same factors pushed around the NZD, seeing it climb to 0.6737 overnight and currently back down to 0.6715. NZD/AUD dived some 40pips after the RBA minutes to 0.9165 but has recovered overnight to 0.9195, back to flat for the day. The whippy nature of the cross in recent sessions suggests that speculators are having a play here. We still think that macro forces will ultimately drive it lower through the next six months.
The GDT dairy auction positively surprised, with the price index up by 3.6%, the first increase since early July, driven by strong increases in whole milk powder (+3.6%), skim milk powder (+8.4%), and cheddar (+7.2%). Dairy prices have recently lagged gains in other commodities so consider the auction as making up some lost ground on that front.
GBP has recovered further, up 0.4% to 1.29, after last week’s tumble, unperturbed that PM Johnson’s controversial Internal Market Bill got through its first reading in the UK Parliament yesterday. Johnson said that the powers of the bill “are an insurance policy, and if we reach agreement with our European friends – which I still believe is possible – they will never be invoked.”
US 10-year Treasuries have remained tightly range-bound and have ticked up 1bp overnight to 0.68%, with a 20-year bond auction succeeding without any drama. NZ rates had a slight upward bias yesterday, with maturities of 5 years plus up ½-1bp across the government and swap curves.
The calendar is action packed for the day ahead. NZ’s current account balance should show further improvement, as is typical in economic recessions as imports slump. This comes ahead of the government’s pre-election economic and fiscal update, which shouldn’t be market moving, with the government’s debt programme likely to remain unchanged. On the global front, the US retail sales release is the key data point, coming ahead of the latest FOMC policy update noted earlier.