It has been a relatively quiet offshore trading session overnight, with equities extending their gains from yesterday and US bond yields moving a touch lower. Currency movements have been reasonably contained although, of note, the NZD/AUD cross has fallen to a four-week low. The movement in the cross follows dovish comments from RBNZ Assistant Governor Hawkesby and Chief Economist Ha at a media briefing yesterday, which reinforced the market’s conviction in a negative OCR next year.
Market sentiment remains positive. Investor confidence is growing that Biden will win by a clear margin at the US election, reducing the risk that Trump disputes the result and allowing the Democats to implement their big fiscal spending plans. Betting markets put the probability of a Democrat clean sweep of the presidency, House and Senate at over 60%.
Against that backdrop, equity markets have made broad-based gains overnight. The S&P500 is up 0.6%, with all 11 sectors in the green, and is now trading at a one-month high. It has increased almost 7% in a little over two weeks. European equities, the NASDAQ and US small cap stocks have shown similar sized gains. US Treasury yields are down slightly, with the 10-year rate hovering close to a four-month high, at 0.77%. Meanwhile, the Bloomberg USD index has drifted slightly lower (-0.2%).
There have been mixed messages on the prospect for a fiscal stimulus bill ahead of the election. President Trump, who said he was unilaterally ending talks for a major stimulus deal earlier this week, appears to have had a change in heart. Trump told Fox the two sides were talking again and those negotiations were “starting to work out.” Democrat leader of the House Pelosi, who is leading negotiations on that side, ruled out a one-off deal for the struggling airline industry and said this would need be part of a broader stimulus package. In economic data, initial jobless claims were essentially unchanged last week, at an extremely high level, suggesting the labour market is losing steam and reinforcing the case for another fiscal stimulus.
The minutes to the ECB’s September meeting showed a bit more concern about the EUR exchange rate, with a further appreciation seen to present a “risk to both growth and inflation.” The September meeting took place shortly after the EUR had reached 1.20 for the first time in over two years. The minutes noted it was “the pace of the euro’s appreciation, rather than the level of the exchange rate, that could become a concern”. The EUR dropped temporarily but it is now back to almost unchanged on the day, at around 1.1750. We expect a renewed appreciation in the EUR next year, in the context of broad-based USD weakness, and provided the move is reasonably steady, we don’t think it should meet too much resistance from the ECB. In other currencies, the JPY is unchanged overnight while the GBP is up marginally (+0.15%).
The NZD has underperformed other commodity currencies, over the past 24 hours following dovish comments from RBNZ Assistant Governor Christian Hawkesby and Chief Economist Yuong Ha at a media briefing yesterday, which have reenergised market conviction in a negative OCR next year. Hawkesby emphasised that inflation and employment were expected to be well below their respective targets over the next three years, which provided “a very clear signal in terms of our dual mandate to be providing stimulus.” Ha reiterated that the RBNZ sees the path of least regret as meaning it would “rather do too much too soon than too little too late ”, in terms of easing. The comments come after a run of stronger domestic economic data of late, implying a better growth outlook than the RBNZ had forecast, but the clear message is the RBNZ is still set on easing further.
The next step with easing is likely to be the launch of a ‘Funding for Lending Programme’ (FLP) for banks, which will involve the RBNZ offering long-term loans to banks at concessionary rates, near the OCR. Hawkesby implied the scheme would have few strings attached and be large in scale, to encourage large take-up and in turn drive down term deposit and real economy lending rates. Hawkesby said further details would be unveiled at the November MPS.
Next year, we think the RBNZ is likely to cut the OCR to negative territory, and the comments from Hawkesby and Ha were consistent with the RBNZ continuing to guide the market, and the general public, in this direction. While caveating his comments by saying that such a move would depend on the economic outlook, Ha observed that NZ had structurally higher retail rates than other countries, such as Australia, and “we may need to get into negative OCR territory to get those rates down.”
The rates market reaction might be considered relatively modest, for what was a very dovish set of comments. The 2-year swap rate fell 1.5bps on the day, and 3bps from its pre-RBNZ media debrief highs, with the market now pricing the OCR to be closer to -0.25% next year. The yield curve steepened notably, with higher global rates adding upward pressure to long-end NZ rates against the repricing of OCR rate cut expectations at the short-end of the curve. There was a 3bps steepening in the 2s10s swap curve and a 4bp steepening in the equivalent bond curve. We expect the yield curve will steepen into the RBNZ’s likely OCR cuts next year.
The NZD/AUD cross has made a four-week low on the back of the RBNZ comments and is trading this morning near the lows of the day, around 0.9185. NZD/USD fell to a low of 0.6547 yesterday afternoon, although it has retraced that move overnight, to now 0.6580, in sympathy with the appreciation in the AUD. The NZD is close to the middle of the 0.64 – 0.68 trading rate that we have pencilled in for the rest of the year.
The RBNZ media debrief completely overshadowed the preliminary release of the ANZ business survey for October, which showed further recovery in the activity outlook, as well as the employment and profits readings. The activity outlook is actually higher than it was a year ago, although it remains at a low level on a historical basis.
The RBNZ announces its bond buying schedule for the week ahead at 2pm today. It has reduced its pace of bond buying the last two weeks although it remains well in excess of tender issuance. We suspect it will keep its bond buying unchanged for next week although there is a chance of a further modest reduction.