Markets are in a “risk-on” mood with a new US President at the helm, expectations of additional fiscal stimulus and positive US earnings reports. US equities show good gains with the S&P500 and Nasdaq index printing fresh record highs. Commodity currencies head the leaderboard, while US Treasuries are tracking sideways.
Biden has just been sworn in as the 46th President of the United States. His office reported that his immediate priority is to sign at least 15 Day-One executive actions, most of them unwinding Trump’s policies. From a market perspective the most relevant are revoking a permit for the Keystone XL oil pipeline, the extension of moratoriums on housing evictions and foreclosures, pausing the accrual of interest and principal payments on student loans, and making it easier for the government to issue regulations. Other policies include re-joining the Paris Climate agreement and directing agencies to consider revising fuel economy and emissions standards for vehicles.
None of these policies are based on “free-market” principles and generally add to the cost of doing business. But the market remains unperturbed, or at least the negative market impact of these policies are being offset by other factors – the expectation of additional fiscal stimulus, for example.
Janet Yellen could be sworn in as Treasury Secretary as soon as tomorrow. As we reported yesterday, at her Senate confirmation hearing she was a cheerleader for a big fiscal stimulus, arguing that the extremely low level of interest rates provided justification for the incoming administration’s plans to “go big” with its proposed $1.9 trillion fiscal stimulus, adding that spending more now would reduce the risk of a long recession.
The S&P500 rose to a record high and is currently up over 1%, no doubt fuelled by fiscal policy expectations and supported by a strong earnings report from Netflix, which helped gains in other companies with TV streaming services including Amazon and Disney. Morgan Stanley posted a record profit, with earnings up 51%.
In terms of negative news headlines, what caught our eye was signs of community transmission of COVID19 in some regions of China, triggering authorities to impose fresh lockdowns and restrict movements across cities. Citizens are being encouraged not to travel during the upcoming lunar New Year holidays. With China leading the world with its economic recovery, an uncontained spread of the virus would represent a key risk to the global recovery thematic, and our prevailing positive outlook for commodity currencies like the NZD.
The market is unconcerned by those reports, with commodity currencies leading the charge for the day. CAD is stronger, following the Bank of Canada’s latest policy announcement, with USD/CAD down 0.7% for the day to 1.2650. The Bank left policy and forward guidance unchanged. Governor Macklem reiterated the pledge to not increase the cash rate until economic slack is absorbed so that the 2% inflation target is sustainable achieved. The QE programme would continue, with the pace slowing only as confidence was gained in the recovery. Supporting the currency, some in the market had expected a “micro-cut”, taking the cash rate to down to just above zero.
The NZD is up 0.5% overnight to 0.7160, with a high of 0.7175. The bulk of the gain coincided with the spike up in the CAD. At least one trading bank here expects a “micro-cut” from the RBNZ but we don’t see that as a likely event. The AUD is up to 0.7740, lagging the gains in the NZD and seeing the NZD/AUD cross regain the 0.9250 mark. The other majors show more modest movements. EUR has been the weakest, down slightly to 1.2100, seeing NZD/EUR regain a 0.59 handle.
The US Treasury market isn’t having a bar of the positive risk backdrop, trading in a tight range, centred around the 1.09-1.10% mark. It was a fairly active day in the NZ rates market yesterday, but with only small movements in rates, with bond and swap rates flat to slightly higher, no more than 2bps.
The economic calendar for the day ahead is full. The December Australian labour market report is expected to show solid employment growth, driving a tick down in the unemployment rate to 6.7%. Another strong print would add to the debate on the what the RBA is thinking about its yield-curve-control strategy and QE policy, ahead of its scheduled expiry at the end of April. The BoJ and ECB meetings aren’t expected to show any change in policy and should pass with little reaction. On tonight’s US economic releases, US jobless claims will be the pick of the bunch. A few analysts are picking the weekly figure to rise back above the 1 million mark, while the consensus sees a nudge down from the previous week’s figure of 965k.