The USD is back under pressure after weak US jobless claims figures and so is GBP after the odds of no trade deal between the EU and UK increased. Commodity currencies are leading the charge, with the AUD blasting up through 0.75 and the NZD back towards the top end of its recent range. The ECB met expectations with the expansion of its bond buying programme.
The S&P500 opened on a soft note, not helped by the poor read from US jobless claims, but market sentiment has improved on a more positive vibe from fiscal stimulus talks. The S&P500 is back to almost flat, while the Nasdaq index shows a small gain.
The ECB boosted its Pandemic Purchase Programme by €500bn to €1850bn and extended it by nine months through to March 2022, a slightly longer window than the market expected. This is in addition to the existing €20bn per month asset purchase programme. In other words, the ECB will keep its money printing operations going for an extended period of time, maintaining the status quo of buying up more debt than euro area governments are issuing and keeping a lid on interest rates across the curve. The ECB also offered more cheap long-term loans to banks for an additional year, through to June 2022.
ECB President Lagarde admitted that while growth could be negative in Q4, the economic projections showed a decent recovery over coming years, while inflation was downgraded, rising to only 1.4% in 2023. Market reaction to the announcement was well contained and against a backdrop of a softer USD, EUR has pushed higher overnight to 1.2120, after almost touching 1.2160.
As we go to press, EU leaders have just officially approved the EU Recovery Fund – mooted some time ago now – a €2200bn stimulus package backed by jointly held debt.
US economic data released had a whiff of stagflation, with higher than expected CPI inflation and a sharp rise in jobless claims. Headline and core CPI both increased by a larger than expected 0.2% in November, with broadly based increases and the figures held down by low rents, a component which makes up a large chunk of the indices. While inflation remains low enough for now, a rising inflation trend through next year would eventually get the attention of the market.
Jobless claims jumped to a three-month high of 853k, around 125k higher than the market expected. Some will point to the volatility around the Thanksgiving holiday, but the reality is that there is ample evidence of a weakening labour market as the third wave of COVID19 strikes the US.
Market reaction was muted to the extent that a weaker economy increases the chance of more fiscal stimulus, even if it continues to look like negotiations remain at an impass. However, overnight Treasury Secretary Mnuchin gave some positive spin, suggesting that progress had been made after further talks and Senate Majority Leader McConnell was on board with his plan. The Democrats are still working on the original bipartisan plan, seeing that as the best path forward. So there is some argument between the original $908bn plan and Mnuchin’s $916bn plan but it’s not insurmountable to do some horse-trading to come to an agreement next week.
The US 10-year rate has been well contained in a 0.915-0.94% range, not reacting to the data or fiscal vibe.
Currency movements have been more interesting. The USD has been on the backfoot, showing broadly-based losses, but GBP has been the worst performer. GDP and industrial production data in October for the UK were much stronger than expected, but a contraction for Q4 overall remains on track as England was placed into lockdown in November. The market ignored the data with Brexit trade talks the key driver.
The outcome between UK PM Johnson’s meeting with EC President von der Leyen in Brussels was that negotiations would restart and they agreed that a decision would be made by the end of the weekend – yet another “deadline”. The mood music was negative, with indications from both sides that the UK and EU positions remained far apart and officials suggesting that “no deal” was more likely. The reality is that some sort of deal remains a no-brainer – in the best interests for both sides – and until the clock strikes midnight on 31 December, then there is deal to be done despite the tedious political posturing played out in public. As we go to press, UK PM Johnson is on the wires, saying that it is more likely there will be no deal than a deal and to prepare for that. GBP has taken another lurch lower, trading below 1.33.
Commodity currencies have outperformed against a backdrop of further gains in commodity prices, including a 3- 4% gain in oil prices, rising food and metals prices, and iron ore now up through $150 per tonne. AUD has outperformed, rising to a fresh high of 0.7530, the market unperturbed by the still-negative China-Australia diplomatic backdrop and reports that wheat and cotton are next in the firing line to be slapped with Chinese import tariffs. The backstory here is that China is apparently willing to step on Australia’s toes so that it can fulfil its obligations to the US, which under the phase 1 trade agreement requires China to step up its US agricultural purchases.
The NZD is enjoying tailwinds from the commodity price backdrop, re-approaching the 0.71 mark. AUD strength saw NZD/AUD dip below 0.94 overnight, while GBP weakness sees NZD/GBP up over 1½% for the day to 0.5335. UD/JPY is fairly steady, so NZD/JPY has pushed up towards the 74 mark.
In the domestic rates market, very strong bidding at the government’s latest bond tender helped NZGBs outperform swaps, with rates down 3bps across the curve with the 10-year rate closing at 0.89%. Swaps were mainly flat, although the 10-year rate was down 1bp to 0.92%.
This morning sees the release of REINZ data for November, likely to continue the story of a booming housing market, while the manufacturing PMI is also released. The global data calendar is light, with only US consumer sentiment of some vague interest.
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