Market sentiment remains very positive amidst Covid-19 vaccine hopes, talk of more US fiscal stimulus, strong economic data and reports that Brexit talks have entered “the tunnel”. Global rates have increased sharply overnight, the S&P500 is up more than 1% and the USD has fallen further. The EUR has decisively broken above 1.20 and is trading at its highest level since mid-2018 while the NZD has pushed up to around 0.7060. The NZD/AUD cross has risen to almost 0.96.
Equity markets have started December positively, after what was an exceptionally strong month of gains in November. A combination of factors has lifted the S&P500 and NASDAQ to fresh all-time highs, with both benchmarks up around 1.3% overnight.
Optimism around global growth continues to grow as investors focus on the roll-out of Covid-19 vaccines next year. Pfizer and BioNtech formally submitted a request for EU regulatory approval for their vaccine, with an assessment due on December 29th, while a decision on Moderna’s vaccine is pencilled in for January 12th. Distribution of the two vaccines in the EU is expected from January. Both pharmaceutical teams have recently submitted proposals for emergency use authorisation in the US. Fed Chair Powell told the Senate Banking Committee overnight that recent vaccine news was “very positive for the medium term”, but he cautioned that the economic outlook was still “extraordinarily uncertain”.
A bipartisan group of US senators has put forward a new fiscal stimulus proposal worth $908b (~5%/GDP). It remains to be seen whether the proposal can win support from either senior Republicans, who have been resistant to large spending proposals, or Democrats leaders, who put forward for a $2.2 trillion proposal before the election. Treasury Secretary Mnuchin and Democrat House leader Pelosi are due to speak later today, for the first time in weeks, to try to agree a spending bill to avert a government shutdown before the end of the year, but Mnuchin said they would also discuss fiscal stimulus.
Market sentiment has also been aided by a report from Times Radio that Brexit negotiations have finally entered the so-called “tunnel”, the final intensive phase of negotiations. Earlier, European Commission President von der Leyen earlier expressed optimism that there could be a deal in the next few days while cautioning that negotiations were “so tricky and so difficult”. A Brexit deal would remove a lingering uncertainty that has been hanging over markets for months.
Economic data has also been strong. The US ISM manufacturing index slipped slightly in November but remains at a very high level on a historical basis, indicative of the robust state of the manufacturing sector. The key new orders index remained close to a 16-year high although, less encouragingly, the employment index slipped back into contractionary territory, at 48.4. Yesterday, the China Caixin PMI rose its highest level in 10-years, another data point signalling the strong state of the Chinese economy. Copper prices, usually seen as a key barometer of global growth, look set to close at their highest level in seven years.
US Treasury yields increased sharply overnight as reports of this bipartisan fiscal stimulus proposal emerged and as risk asset markets headed higher. The US 10-year rate is up 8bps, to 0.92%, while European 10-year yields were 4-5bps higher. The US 10-year rate remains contained within its existing trading range, having reached a high of 0.97% a few weeks ago when Pfizer first announced its encouraging vaccine trial results. Market-based inflation expectations (so-called ‘breakeven inflation’) have also increased, as the market looks towards a strong economic recovery next year. The US 10-year breakeven inflation rate rose 3bps to 1.82%, its highest level since mid-2019. While still low in absolute terms, and relative to the Fed’s 2% target, the directional move in inflation expectations is consistent with the pricing signals from other asset classes such as equities and commodities.
The USD remains under pressure amidst buoyant risk appetite, growing global growth expectations and reports of a nearing Brexit deal. The Bloomberg USD index (BBDXY) has fallen another 0.6%, its biggest one-day fall in almost a month, to a fresh 2½ year low.
The EUR has decisively broken above the psychologically important 1.20 level and is up almost 1% on the session. It is trading at a 2½ year high, at around 1.2050. The GBP hasn’t been able to keep pace with the EUR, even after reports that Brexit negotiations have entered “the tunnel”. The GBP is 0.75% higher from this time yesterday, at around 1.3425. Meanwhile, the safe-haven JPY has underperformed and is barely changed over the past 24 hours.
Against a backdrop of broad-based USD weakness and higher equity markets, the NZD has continued to push higher. The NZD is up around 0.6% on the session, following on from its 6% gain in November. It trades this morning around 0.7060. The AUD has underperformed, seeing the NZD/AUD cross move up towards 0.96, its highest level since April. There was little reaction to yesterday’s RBA meeting, where the central bank kept its policy settings on hold, reiterated that it didn’t expect to raise its cash rate for at least three years, and said it would keep its bond buying programme “under review”. Governor Lowe testifies before parliament tomorrow.
Last night’s dairy auction revealed a 4.3% gain for the overall index, a bit better than the 2-3% gain we had pencilled in, with whole milk powder prices rising 5%. Whole milk powder prices are back close to their highs of the year, supported by a lower USD (which provides a denomination tailwind), higher US feed costs, higher oil prices, and more positive economic indicators out of China.
NZ rates were barely changed yesterday, with movements of 1bp or less across the curve. But NZ rates will open higher this morning in sympathy with the overnight moves in US Treasuries and the 10-year Australian bond future (+5bps since the NZ market close).
In other news, the RBNZ yesterday confirmed its Funding for Lending Programme (FLP) will start next week, on the 7th of December. From next week, banks will be able to access three-year funding directly from the RBNZ with the interest rate set at the prevailing OCR, which is cheaper than alternative long-term funding sources such as term deposits and wholesale debt. The maximum funding available through the FLP, assuming banks meet certain lending targets, is around $28b. Term deposit rates have fallen significantly in recent months and the RBNZ said at the November MPS that it expects to see pass-through from the scheme to lower real economy lending rates.