Despite some mixed US economic data and an apparent stalemate reached in US fiscal relief package negotiations, US equities have begun the new quarter on a positive note. Currency movements have been modest apart from some whipsawing in GBP on Brexit-related news, while the NZD has outperformed.
After yesterday provided some hope that a US fiscal relief package could be agreed, a stalemate has been reached after further talks. Speaking to reporters, House Speaker Pelosi said she was optimistic, before rattling off all the important differences between the two sides. These included the key sticking point of the Democrat’s plan of $436b in local and state government aid, which the Republicans simply see as a bailout for poorly run states.
US economic data were mixed. ISM manufacturing came in weaker than suggested by the regional indicators, but the level at 55.4 was still consistent with decent recovery in the sector, and the employment index rose to just below 50. Jobless claims were slightly better than expected, but still consistent with a sluggish recovery in the labour market. The end of extended unemployment benefits saw a plunge in personal income, with higher spending coming via a lower savings rate. The data confirmed a strong Q3 rebound in consumer spending in train, but said nothing about the outlook, which must surely be weaker, given the lack of income support. Inflation pressures were higher than expected, with the core PCE deflator, the measure most closely followed by the Fed, rising 1.6% y/y.
The mixed news hasn’t perturbed equity investors, with the S&P500 opening stronger and spending the whole session so far in positive territory, and currently up 0.5%. The now-small energy sector is a laggard, after oil prices have plunged again, down over 4% at one stage, with Brent Crude briefly going sub $40 overnight and WTI falling below $38 – the lack of fiscal agreement adding to the concern about the demand for oil, while supply is on the rise.
The US 10-year Treasury rate pushed up to a high of just below 0.72% after the stronger jobless claims and inflation data were published, but it all looked a bit odd given that the Fed would welcome a period of above 2% target inflation and not fight against it for some time. The 10-year rate subsequently fell back to 0.68%, with the weaker ISM manufacturing data helping, seeing the rate little changed for the day.
GBP has seen whippy trading with 1.2820-1.2980 covering the range on rounded figures, and down 0.2% for the day to around 1.2900. The European Commission began legal proceedings against the UK over PM Johnson’s plan to override key parts of the Withdrawal Agreement. A letter of formal notice was sent, which kicks off the legal progress that could ultimately end up adjudicated by the European Court of Justice. GBP plunged on the announcement, but soon recovered, before weakening again. The EC sends out dozens of these notices each month and most disputes are settled before reaching the ECJ. The Dutch PM played down the letter and said that it “should not too much influence the negotiations with the UK”.
On Brexit negotiations, Bloomberg reported sources saying there has been no decision yet on whether enough progress has been made to enter the crucial “tunnel stage”, referring to the drafting of final text under tight conditions that control any outside leaks. The FT noted EU diplomats saying they did not expect to enter the tunnel until after the mid-October EU summit, contrary to the more optimistic view given from the UK side.
Elsewhere, currency movements have been modest, although the NZD heads the overnight leaderboard, showing further signs of recovery after last week’s rout and heading towards 0.6660. The AUD traded above 0.72 but has since nudged back below to 0.7190, with NZD/AUD nudging up to 0.9250.
The backdrop of a stronger CNY has helped the antipodean currencies. CNY continues to appreciate, following its best quarter in 12 years in Q3. USD/CNY is down 0.4% for the day to 6.7908. China’s response to the COVID19 outbreak has been better than the US and Europe, and its economy is leading the global recovery.
The domestic rates market was heavy again yesterday, with sellers of NZGBs and payers of swap lurking, not helped by higher US rates seen in the previous overnight session. NZGB yields were 1-2bps higher across the curve, while 2 to 10 year swaps rates rose by 2-3bps. Some traders evidently have lost interest in betting that the RBNZ will rip up its forward rates guidance with an early rate cut in February. The OIS rate for the February meeting closed at 0.125%, suggesting now “only” a 50% chance of a 25bps cut. That OIS rate was as low as 0.07% a month ago.
In the day ahead the focus will be the US non-farm payrolls report, where the market expects solid growth in employment and a fall in the unemployment rate to 8.2%. Markets typically trade quietly heading into that release.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.