US equities are in recovery mode, following yesterday’s swoon, on a day with little fresh news to report. US Treasury yields are ticking higher, while the NZD and AUD are trying to recover after the losses seen during local trading hours, after more dovish-speak from the RBNZ and RBA.
As far as we can see, newsflow overnight, while sparse, has been weighted towards the negative but that hasn’t stopped the S&P500 recover 1.3% at the time of writing, after yesterday’s 1.6% fall. Fiscal stimulus headlines dominate the news board, with no agreement for a relief package and clear differences still remaining between the Democrats and Republicans. Mnuchin and Pelosi plan to speak next around 8am NZ time, ahead of an impending deadline. Pelosi has indicated that the White House needs to reach a deal with Democrats by the end of the day, US time, if the government wants to pass a bill before Election Day.
In other news headlines, the US Justice Department filed an aggressive antitrust lawsuit against Google related to its dominance in search engines and advertising. That hasn’t perturbed investors, with parent stock Alphabet up over 2% for the day.
The US 10-year rate has moved up to the top of its recent trading range, up 2bps to 0.79%. US housing starts and permits were very strong, even if the former was slightly lower than expected – headline starts were dragged down by multi-family starts, with single-family starts gaining sharply for a fifth consecutive month to a 13-year high.
In a sign of unsatiated demand for high-quality paper, the EU tendered an issue of €10bn 10-year bonds and €7bn 20-year “social” bonds and received an enormous amount of €233bn of bids for the AAA-rated paper, with the 10-year yield going at minus 0.26%.
In currency markets, stronger US equities sees a weaker USD, with the index down some 0.4%. EUR and CAD are leading the charge, the former 0.5% to 1.1835. GBP is flat at 1.2945. The NZD and AUD are the two weakest performers since this time yesterday, after dovish comments from the RBNZ and RBA drove them lower during NZ trading hours. The NZD fell to a low of 0.6553 overnight, but has since recovered to 0.6590. AUD found support just above 0.7020 and has recovered to 0.7065.
In a speech, RBNZ Governor Orr continued with the dovish talk we have seen on a regular basis over recent months from MPC members, talking up the merits of negative interest rates, saying they “can be highly effective and highly efficient”. And while NZ and the world economy were recovering after the big hits seen earlier this year, the RBNZ “still needs to operate with a medium-term focus”. It all pointed to more forthcoming policy stimulus with the Bank preferring to deal with “more inflation than battle deflation”.
Orr kept alive the chance of a rate cut as soon as February by saying that the OCR would remain at 0.25% until February-March. OIS rates through the next year fell by 1-3bps, dragging the 2-year swap rate down 2bps to 0.02%. Other bond and swap rates were down 1-2bps across the curve.
The market ignored the stronger Quarterly Survey of Business Opinion report earlier in the day, which showed a sharp rebound in domestic trading activity and surprisingly strong employment indicators. A net 16% of businesses expect to increase employment over the next three months, well above the long-term average of +1 and well up from the minus 19% in Q2. As Orr indicated in his speech, the Bank is less-interested in the near-term recovery and more focused on the soft medium-term outlook, suggesting that a further run of strong data might not get in the way of further easing.
The RBA’s minutes of its early-October policy meeting read very much like Governor Lowe’s dovish speech last week, arguing that further policy easing would likely gain more traction compared to earlier in the year, with the economy now in the recovery phase. The Bank noted the larger balance sheet expansions of other central banks and the implications of this on bond yields and the AUD. Earlier, Assistant Governor Kent in a speech noted one option in the mix was to buy longer dated bonds. All this reinforced market expectations of a small rate cut and more QE to be delivered next month.
Finally, the overnight GDT dairy auction showed little movement in milk prices, with while milk powder up 0.3% and skim milk powder down 0.2%. Cheese and butter prices were up 3+%, with the overall price index up 0.4%. The data won’t have much impact on milk payout calculations after Fonterra recently raised its mid-point for the current season up over 6% to $6.80.
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