Markets have taken on a more cautious tone, following the vaccine optimism-led rally in risk appetite, with US and European equities lower overnight. This has supported US Treasuries, alongside soft CPI data, seeing the 10-year rate down 4bps since the NZ close. Commodity currencies are slightly weaker overnight, with the NZD falling to 0.6850 as we go to print.
Market optimism earlier this week has given way to some caution, perhaps just a sign of some profit-taking or some realism that near-term challenges for the global economy remain. Fronting the headlines, COVID19 remains in focus, as new cases in the US hit a fresh record of 144k for the day and the hospitalisation rate is also at a record 65k. New York imposed a new restriction with bars, restaurants and gyms to close at 10pm and indoor gatherings limited to 10 people. On a more positive note, top US health advisor Fauci said that COVID19 “is not going to be a pandemic for a lot longer, because I believe vaccines are going to turn that around”.
US equities have spent the entire session in negative territory so far, with the S&P500 currently down 0.6%, following a 0.9% fall in the Euro Stoxx 600 index.
In economic data, the US core CPI was flat in October, undershooting market expectations, and driving inflation further away from the Fed’s target. Initial jobless claims continued to trend lower, albeit at a pedestrian pace, even if it was a slightly better result than the market expected. At over 700k a week, the figure is still above the level seen at the depth of the GFC, indicative of a still very weak labour market.
The cautious market backdrop and weak CPI data have helped push the US 10-year rate down 8bps for the day to 0.90%, some 4bps lower since the NZ close. In comments in a panel discussion at the ECB’s Annual Forum –which is ongoing as we go to print – Fed Chair Powell said that the economy was on a solid path but there was a risk from a resurgence in the virus. The vaccine news was welcomed for the medium-term outlook, but there are near-term challenges. On policy he said that the crisis requires a response from monetary and fiscal policy makers, and the Fed may need to do more.
In other data news, the strong rebound in UK GDP for Q3 was broadly in line with expectations, but left the economy still a huge 10% smaller than pre-COVID levels, ahead of the recent new nationwide lockdown that was imposed, a view acknowledged by BoE Governor Bailey’s after the figures were released. He added that more information following UK-EU trade talks could affect the BoE’s policy decision next month. The Bank’s current assumption is that a trade deal will be agreed.
The GDP data had little impact on GBP at the time, but the currency has subsequently ended up being the weakest of the majors overnight and now down 0.8% for the day to 1.3120. By contrast, EUR is the strongest major overnight, pushing up to 1.18. Euro-area industrial production fell by 0.4% against expectations for a 0.6% increase, but these weaker figures didn’t seem to be market-moving.
The soft risk appetite backdrop has seen commodity currencies a little weaker. The NZD has found the air pretty thin above 0.69, and has tracked lower, currently at its lows for the day near 0.6850. The AUD has followed a similar path and trades on the soft side at 0.7240.
The domestic rates market had a choppy trading session yesterday, with some post-MPS positioning readjustments still evident. The net result was some evident curve flattening, with longer term NZGB and swap rates down in the order of 3-4bps, while the short end of the curve was underpinned.
In a Bloomberg interview Assistant Governor Hawkesby said that negative rates are less likely if banks reduce lending rates. He commented “if the banks don’t like having a negative OCR, then passing on as much of the Funding for Lending Programme as possible through lower lending rates is going to reduce the likelihood that a negative OCR is needed”.
Earlier in the day, REINZ data showed further evidence of a booming housing market, with composition-adjusted house prices up 13.5% y/y in October, with nearly 10 percentage points of that gain over the past four months. It remains a mystery why the RBNZ is desirous of even lower mortgage rates to add further fuel to the market, in the belief that it would be a good thing for meeting its objectives.
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