There has been a flood of economic news and other headlines, almost too many to mention (sorry Bitcoin cheerleaders), but the net result is only modest changes in financial prices, ahead of the Fed announcement due at 8am NZ time. The impact on the market of very weak US retail sales data has been offset by signs that agreement on a US fiscal stimulus package is imminent, while the hurdles are being cleared for a Brexit trade deal as well. Euro area activity data positively surprised.
A shocking fall in US retail sales would normally see a risk-off tone to markets, but sentiment has been supported by the prospect of an imminent agreement to further fiscal stimulus for the economy. The S&P500 is currently up slightly, while the US 10-year rate is also a touch higher, trading around 0.92%, after earlier hitting 0.95%. All this could easily change after the FOMC delivers its latest policy update and Chair Powell’s press conference.
Word on the street is that US lawmakers are on the verge of agreeing to a fiscal stimulus package that excludes the most contentious issues, but still in the order of $900b. The deal will include stimulus payments to individuals (around $600-$700 each) and supplemental unemployment insurance (around $300), and exclude both direct aid to state and local governments and liability protections for businesses. We might have some formal announcement later today.
US retail sales were much weaker than expected in November, well into negative territory, with headline sales down 1.1% and core measures only slightly better than that – finally some hard evidence that the spread of COVID19 across the States is impacting on the economy as restrictions are imposed and consumers behave more cautiously. The market reaction was muted to the extent that it adds to the pressure for lawmakers to add some fiscal stimulus to the economy, which now looks imminent.
European flash PMI readings positively surprised, with many series rising against expectations of a fall for December. Germany’s manufacturing PMI rose to its highest level since mid-2018, with reports of order books increasing sharply, supported by rising export sales, notably from China. The euro-area aggregates for both manufacturing and services were stronger, with the only downer being that the services sector remains below the 50 mark, albeit understandable with the widespread lockdowns.
On Brexit negotiations, sources point to some resolution of the “level playing field” issue, with the UK accepting the idea of “managed divergence”, or increasing its standards on welfare and labour if and when the EU does so in the future. EC President von der Leyen said that fishing rights were now the last major hurdle to a trade deal. We remain optimistic that a deal will be reached.
GBP has been the strongest of the majors overnight, stretching above 1.3550, before paring off and now up only 0.2% to 1.3470. EUR shot higher after the PMI data, breaking 1.22 for the first time since early 2018, before paring gains.
The US labelled Switzerland as a “currency manipulator” for the first time in the latest Treasury foreign exchange report. With a forthcoming change in Treasury secretary under the Biden Administration, the report has little implication. The Swiss National Bank swiftly denied the label. The only real surprise is that it is taken this long for the US Treasury to label the country as a currency manipulator, as it has been actively buying foreign currency for years to hold back appreciation of CHF.
The NZD and AUD have been out of the spotlight. While both are little changed from this time yesterday, the NZD has weakened overnight after enjoying some gains after the government’s fiscal update. The update told a story of the economic recovery proving to be much better than seen at the last (pre-election) update. Thus, the bond programme was reduced by $5b per annum, accumulating to $20b less debt issuance over the next four years. This will allow the RBNZ to taper its bond purchases from early next year to keep yields in check. There was little impact of this on the rates market – NZGB yields closing the day up 1-2bps, more a reflection of global forces – with the forecasts being well-anticipated and the impact of the reduced future debt issuance and likely RBNZ’s actions cancelling each other out.
The NZD hit a fresh high of 0.7121 overnight but has since fallen away to 0.7075, reinforcing the 0.71 mark, or just over, as a key level of resistance – the currency making four charges above 0.71 over the past fortnight, but not sustaining above that level. NZD/AUD had a run back above 0.94 after the fiscal announcement, but has since fallen below 0.9360, a fresh one-month low, with the AUD tracking sideways around 0.7560.
At the FOMC announcement due soon after we go to print, the consensus expects a change to the Fed’s forward guidance on asset purchases, linking guidance to economic outcomes. At the moment the Fed is buying about $80bn of Treasuries per month, a quantum that has been steady over recent months. Linking the quantum of QE to the state of the economy is a more sensible approach going forward. There is a chance that the Fed lengthens the maturity of purchases – which would be USD-negative – but most believe this decision to more likely come next year.
Later today, NZ GDP for Q3 is expected to show a sharp bounce-back with expectations around the 13-14% mark – old news, but confirmation that the recovery is on track. The Australian employment report is expected to show the unemployment rate stabilising around 7.0%. Only second-tier US releases are due tonight, while the Bank of England isn’t expected to change policy, with the outlook heavily driven by the outcome of EU-UK trade talks.
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