Little progress on US fiscal stimulus talks. UK PM Johnson heads to dinner to help restart Brexit negotiations. USD recovers a little. AUD a notable outperformer

It has been another uneventful night of trading, with little progress on US fiscal stimulus talks and as UK POM Johnson heads to Brussels to get Brexit talks back on track. In a reversal of yesterday, US equities are slightly lower, while the US 10-year rate is slightly higher. Currency moves have been modest, but with notable outperformance of the AUD and a softer EUR against a backdrop of a slightly better performance for the USD.

In light pre-Christmas trading conditions, the usual stories are hogging the headlines and markets are effectively treading water. The S&P500 shows a modest fall, dragged down by the IT sector, with the Nasdaq down over 1%. The US 10-year rate is up about 1bp from the NZ close, currently trading at 0.94%.

Yesterday, Treasury Secretary Mnuchin proposed a new $916bn fiscal plan after Democrats rejected a narrower plan after Senate Majority leader McConnell said he was willing to temporarily set aside the contentious issues of state and local aid and liability protections for businesses to get a deal done and revisit these later. House majority leader Pelosi said parts of the new plan were ‘unacceptable’, referring to the sharp cut in proposed spending on jobless benefits. So we are back to square one, with McConnell blaming the Democrats for pouring cold water on his idea. The likely path from here is that negotiations continue for at least another week.

There have been no new developments on a Brexit deal as UK PM Johnson headed to Brussels to a meeting with EU President von der Leyen for a dinner as we write. Before he left he said that no UK leader could accept the EU’s Brexit demands on business competition and fishing. We should know later today if the dinner talks were satisfactory enough to restart the negotiations.

The Bank of Canada policy meeting came and went with no changes to policy, as expected, with the policy rate to be left at 0.25% “until economic slack is absorbed” and inflation is sustainably back to the 2% target (not expected until at least 2023), while the Bank will continue to buy at least CAD4 billion a week in government bonds until the recovery is “well underway”.

Currency markets show modest changes against a backdrop of a USD recovery, but of note is AUD outperformance, hitting a fresh 18-month high of 0.7485 overnight as the USD weakened further, before paring gains to 0.7440. This might reflect some digestion of data that showed Westpac’s Australian consumer sentiment index rising to a ten-year high. Westpac’s Bill Evans noted in the write-up that with improving unemployment rate forecasts, “by 2022, if the near term forecast is for the unemployment rate to be returning to near pre COVID levels, it will be difficult to justify forward guidance that the cash rate will remain on hold for a further three years”.

Initial USD weakness overnight saw the NZD make another charge towards 0.71, falling short at 0.7095, before falling back to around 0.7025 as the USD recovered. NZD/AUD has trended lower over the past 24 hours and is currently 0.9445. There was little market reaction to a number of Q3 NZ activity indicators released– including strong manufacturing data. These data allowed us to firm up our Q3 GDP estimate (data released next week) at 14% q/q, a strong bounce-back following the 12.2% contraction in Q2.

The NZD is mixed on the other crosses, with a softer EUR seeing NZD/EUR lift slightly, NZD/JPY flat and NZD/GBP slightly weaker.

The domestic rates market remained quiet, with 1-2bps falls across the swaps and bond curves.

In the day ahead, NZ electronic card spending data will provide some insight into whether the very strong bounce-back in spending spilled over into November. The ECB meets tonight and has already prepped the market for an extension of its bond buying programme and cheap long-term funding for banks, preferring these measures than a further reduction in policy rates. The Bank won’t want to disappoint the market so consider this a done-deal, restraining any likely market reaction. US jobless claims and CPI data and UK GDP data are all expected to be underwhelming.