Market conditions are quiet ahead of the US Thanksgiving holiday, but a more cautious tone has been adopted, seeing small falls in US and European equities and a small fall in the US 10-year rate. That backdrop hasn’t stopped the NZD printing a fresh 2½-year high just above 0.70, with other currencies showing small gains against a soft USD.
Markets have adopted a slightly more cautious tone, one day after the Dow Jones index topped 30,000 for the first time. Trading conditions are lighter than usual, ahead of the US Thanksgiving holiday. The S&P500 opened weaker and currently trades down 0.3%, following a 0.1% fall in the Euro Stoxx 600 index. Big tech is outperforming, with the Nasdaq in positive territory.
There were a number of US economic data releases overnight, which have been mixed overall. Jobless claims data showed the first back-to-back rise since July and were ahead of market expectations, reflecting a weakening labour market – reflecting reduced benefit payments and the spread of COVID19. The former was also evident in the fall in personal income, meaning savings were tapped to sustain consumer spending. The trade deficit remained on an upward path, just shy of a record high, as imports outpaced exports.
On a more positive note, durable goods orders were stronger than expected and came with upward revisions, putting business investment on a stronger path – reflecting a more robust manufacturing sector of the economy compared to the services sector. New home sales remained very strong.
President Xi congratulated Biden on his election victory and said China wants to advance a “healthy and stable” relationship and uphold principles of “no conflict” and “no confrontation”. It remains to be seen if the US-China relationship will improve under Biden.
US Treasury yields have a slight downward bias, with the 10-year rate down a couple of basis points overnight to 0.865%.
Currency movements have been modest. The USD has maintained a soft underbelly so all the majors are higher for the day. Overnight moves have been small, but the NZD remains a notable outperformer, pushing back up through 0.70 and printing as high as 0.7012 (so far), its highest level since June 2018. Alongside positive global forces, the evidently stronger than expected recovery in the NZ economy, bullish anecdotes on business conditions and the market increasingly coming around to the view that further rate cuts are not required see the NZD as flavour of the month, now up 6% through November.
The domestic rates market saw some further positioning adjustments following the public “dialogue” between Finance Minister Robertson and RBNZ Governor Orr on the housing market. This saw a steepening in both the swaps and NZGB curves. Rates fell on the open, as Governor Orr’s retort of “we already take into account the housing market” on Tuesday came after the market close, but further digestion of the issues saw the market reverse course to lift rates across the curve.
The release of the RBNZ’s Financial Stability Report was overshadowed by interest in Governor Orr’s response to Robertson’s letter. Orr reiterated the view espoused in his written response the previous day and added that the policy outlook hadn’t changed in the wake of the government’s proposal that house prices be included in the RBNZ’s remit – the Bank’s policy intentions “stand as stated two weeks ago”. Orr batted away the prospect of a negative OCR saying, “I don’t believe we’ve ever said we are going to be implementing a negative OCR”. The Funding for Lending Programme remains the policy of choice for the RBNZ to promote further reductions in mortgage rates.
The outperformance of swaps over bonds and further steepening of the curve, gave a hint of the market seeing less scope for QE, after previously pricing a significant reduction in the chance of any further rate cuts. After all, if one takes the view that a further OCR cut is now likely off the table, then the following logical move from the Bank –even if not yet on the near-term horizon – would be a more meaningful tapering of asset purchases. Short-dated bonds saw a small lift in yield for the day, while the 10-year rate rose by 6bps to 0.96%, its highest close in over four months. The 2-year swap rate fell by 2bps to 0.29%, reflecting a bit of an overshoot the previous day, while 10-year swap rose by 3bps to 0.98%.
The NZD is higher on all the crosses, showing small gains across the board. GBP is the one to watch over the next week. European Commission President von der Leyen said that the next few days will be decisive for trade negotiations with the UK, adding that three issues remained that could make the difference between a deal and no deal – the level playing field for businesses, the enforcement of any agreement, and access to British fishing waters.
In the day ahead, the FOMC releases the minutes of its meeting earlier this mont, while a quiet end to the week is likely ahead of the US Thanksgiving holiday.