Stronger than expected US data and renewed hopes that US lawmakers can agree to a fiscal stimulus package have supported risk sentiment, seeing higher US equities, higher Treasury yields and stronger commodity currencies.
It was looking like we were heading for a negative trading session in the US, after the train-wreck coming from the first US Presidential debate, widely viewed as an out of control shout-fest that did nothing to support the candidates or paint US politics in a positive light. It confirmed market fears of a contested election by Trump if he loses, setting the scene for months of uncertainty and distraction post the early-November election, while betting sites saw the odds of a Democratic “clean sweep” rise slightly, another negative factor for US equities.
So it was “risk-off” in the aftermath of the debate, seeing S&P futures down as much as 1.3% and the NZD moving sustainably below 0.66, down to 0.6570. A series of stronger US data releases and a positive vibe on US fiscal negotiations saw a reversal of risk sentiment, driving risk assets higher. The S&P500 is currently up 1½%, with all sectors contributing to the broadly-based rally.
US lawmakers are closing the gap in terms of agreeing the size of a fiscal relief package. Treasury Secretary Mnuchin suggested he’d give negotiations “one more serious try” and offer Democrats a proposal for $1.5 trillion in aid, with a plan to raise that to $2 trillion if the pandemic persisted, just shy of the $2.2 trillion currently on the table from the Democrats. Republican Senators still remain an obstacle, but further progress in negotiations offers some hope – that had recently been extinguished – that fiscal relief can be agreed before the election.
On the economic side, US ADP employment, Chicago PMI and pending home sales reports were all stronger than expected. Some 749k private sector jobs were added in September according to ADP, continuing the recovery, albeit with employment still significantly below pre-COVID levels. The data comes ahead of the more important non-farm payrolls report tomorrow night. The much stronger Chicago PMI should support a further rise in the ISM manufacturing indicator released tonight.
Yesterday, the official China PMI data also pleasantly surprised and showed further signs of economic recovery in September.
Renewed fiscal hopes and strong data saw some life brought back into the US Treasuries market, with the US 10-year rate rising by 6bps to 0.70%, a “tantrum” in the context of recent low market volatility. Some consolidation has taken place over the last couple of hours and the yield is 0.69% as we go to print.
In currency markets, safe havens have underperformed overnight, with the USD, CHF and JPY lagging. EUR has been choppy and weak, with two notable headwinds. Firstly, the release of an EC “rule-of-law” report is a setback to the creation of the key EU Recovery Fund. Agreement for the creation of the Fund requires unanimous support amongst the bloc’s 27 members and some of the detail was left for further negotiation. The rule of law report singled out a few Eastern European countries with law deficiencies to investigate and prosecute high-level corruption. Hungary and Poland reject the current proposal, which protects EU funds from fraud in cases where institutions are weak. A spokesman for Germany said that “A delay of the EU budget and the recovery fund is becoming increasingly likely”.
Secondly, ECB President Lagarde gave some support to looking at the Fed’s new “average” inflation targeting strategy as part of the ECB’s monetary policy strategic review due mid next year. Such a strategy allows for a period of above-target inflation following a period of sub-target inflation. The comments follow the Banque de France Governor’s similar views we noted at the beginning of the week.
Commodity currencies and GBP have been the notable outperformers overnight. The NZD is up to around 0.6620, while AUD reached 0.7170. On the crosses, NZD/AUD is lower for the third consecutive day, down a touch to 0.9235, while NZD/EUR has shown the biggest move, up 0.7% for the day to 0.5650.
GBP has pushed up to 1.2910, even as Brexit negotiations continue to overhang the currency. Bank of England Chief Economist Haldane added to the chorus that negative rates aren’t imminent in the UK, saying work is likely to take months. He outlined three conditions before judging whether negative rates should be applied and none were currently satisfied: operational feasibility; macro necessity for further stimulus; and conviction that the benefits outweighed the costs.
The domestic rates market traded heavy yesterday, with a lack of investor appetite to take NZGB yields any lower. There was a reasonable sell-off across the curve in the order of 4-5bps, seeing the 10-year rate back at 0.50%. The sell-off in the swaps market was more contained, with yields up 1-3bps.
The ANZ business outlook survey for September showed further improvement from the early September flash estimates, which itself was an improvement from August, supported by some easing of restrictions. The overall message was one of a tepid economic recovery, with a mixed performance across sectors. In an interesting special question, interest rates were the bottom of the list as a concern for business investment – finding skilled labour, regulations and paperwork headed the list. It highlighted the futility of lower interest rates to drive economic behaviour when they are already at historically low levels.
Corelogic data released overnight showed a lift in house price inflation to 7.6% y/y in September, something that lower rates is helping to support, good for homeowners but not necessarily good for society.
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