Equity markets and bond yields have been very volatile over the past 24 hours, initially diving after Trump said he was unilaterally ending fiscal stimulus negotiations, then rebounding overnight. The S&P500 and US 10-year rate have made an almost complete recovery from their lows yesterday morning while the USD has again turned lower on improved risk appetite. There has been no such recovery for the NZD though, which is trading near the lows of the day, below 0.66. There has been little reaction so far to the just-released FOMC minutes.
Shortly after we sent this note out yesterday, Trump tweeted that he was ending fiscal stimulus talks ahead of the election. The tweet was a complete surprise to the market, which had started to price-in a greater chance of a fiscal deal on signs that negotiations between the White House and Democrats were finally making progress. The S&P500 subsequently nosedived more than 2% into the market close yesterday morning. Likewise, the US 10-year Treasury yield fell 5bps, to 0.73%, and, in currencies, the NZD fell more than 0.5%, breaking below 0.66 in the process.
Only hours after his statement that he was ending fiscal stimulus negotiations, Trump took to Twitter to say he would support a one-off bill for another round of $1,200 stimulus checks to US households, along with targeted stimulus for the airline industry and US small businesses, with unused funds from the CARES act. With the exception of support for airlines, Democrats are opposed to a piecemeal approach to stimulus because it reduces their leverage in negotiations, in which they are trying to convince Republicans to provide more funding for state and local governments. White House economic advisor Larry Kudlow told CNBC that the chances of one-off stimulus bills passing was “probably….low probability stuff.”
Regardless, equities and bond yields have moved sharply higher since yesterday morning, largely reversing their late-session falls. The S&P500 is 1.8% higher overnight, the NASDAQ is up 1.9%, despite growing concern that big tech firms could face stricter antitrust laws under a Biden presidency, and small-cap stocks have again performed strongly, with the Russell 2000 up 1.7%. Meanwhile, the US 10-year Treasury yield has recovered from 0.73% to 0.78% as we write this. The USD has experienced a broad-based depreciation, except against the JPY and – strangely – the NZD, consistent with a more risk-supportive backdrop. The Bloomberg DXY is down 0.2% overnight, reversing around half its appreciation yesterday.
One interpretation of the rebound in markets is that investors see Trump’s proposal for one-off stimulus bills as a sign that he has not closed the door on a meaningful stimulus deal before the election (despite claims from some commentators that it is a political stunt so he can shift blame to the Democrats). Another interpretation is that market conviction is growing that Biden will win decisively at the election and the Democrats will sweep both houses of legislature, allowing them to implement their proposed large fiscal stimulus after Biden takes power. The implied odds of a Biden victory in betting markets (currently around 65%) continue to trend gradually higher.
The FOMC minutes were released a short time ago, although markets have barely moved in response. The meeting included a debate over how the Fed should communicate its new policy framework, where it will aim for inflation above 2% for a period. FOMC members generally agreed its commitment to keep rates lower for longer (with no hikes until at least 2024 according to the most recent ‘dot plot’’) was not an “unconditional commitment”, implying that, this forecast path is dependent what happens to inflation (primarily) and the labour market. There wasn’t much discussion around bond buying, which may have slightly disappointed the market. That said, the minutes report that “many ” of the members assumed more fiscal stimulus would be forthcoming, so one take would be that the Fed may ease further if a deal falls through.
Brexit negotiations continue to rumble away in the background, ahead of the key 15th October EU Summit. Bloomberg reported that the UK was prepared to walk away from trade negotiations (i.e. prepare for a ‘hard Brexit’) if there was no clear “landing zone” for a deal at the Summit. Negotiators are stuck on the issues of fishing rights and state aid amid reports earlier this week that the EU was not prepared to make compromises ahead of the Summit. The GBP has taken the news in its stride, suggesting the market remains sanguine that a hard Brexit can be averted, and it is up 0.2% over the past 24 hours, to around 1.2910. The EUR up a similar amount overnight, to around 1.1765.
While most currencies have gained against the USD over the past 24 hours, except the safe-haven JPY, the NZD has underperformed notably. The NZD broke below 0.66 yesterday morning, after Trump’s tweet that he was calling off fiscal stimulus talks, and it has stayed down, despite the USD weakening and equity markets recovering. The NZD is trading around 0.6575 this morning, down 0.2% on the day, and has lost ground on all the key crosses, except NZD/JPY. The NZD/AUD cross has slipped 0.7% to 0.9215, a three-week low. There hasn’t been an obvious catalyst for the NZD underperformance so we’ll put it down to ‘more sellers than buyers’.
In NZ wholesale rates, the curve moved lower and flatter yesterday, with the 2-year swap rate falling 2bps, to 0.04%, and the 10-year rate 3bps, to 0.51%. The falls in NZ rates mainly reflected the post-RBA falls in Aussie government bond yields, as the market prepared for fresh, albeit incremental, monetary stimulus in Australia. Australia’s 3-year yield reached a record low of 0.13% yesterday, suggesting the market sees a high chance that the RBA cuts its cash rate and 3-year yield targets to 0.1%.
At 8am this morning, New York Fed President John Williams will be speaking on the Fed’s new ‘flexible average inflation targeting’ regime, with the market looking for clues around how the central bank intends to operationalise the strategy (e.g. just how large an inflation overshoot is the Fed prepared to tolerate). The preliminary release of the October ANZ business survey is the local highlight today.