Back to normal trading - equity markets show solid gains. AUD the worst performer post dovish RBA statement. USD shows broad-based gains. NZ rates sell-off ahead of bond syndication and ahead of important NZ labour market data today

It looks like the frenzy in stock (and silver) trading by retail punters is nearing an end and it’s back to “business as usual”, with equities showing another day of solid gains. The USD has found some broad-based support. The AUD is the worst performer after the RBA’s dovish surprise, while EUR is struggling as well. UST10 yields have pushed a little higher.

The wild trading in some US stocks seems to drawing to a natural conclusion, and some late buyers to the party will be licking their wounds. Gamestop is down nearly 50% after its 30% plunge yesterday, while AMC is down almost 40%. The silver market – which purportedly was in the sights of the Reddit brigade – shows prices reversing yesterday’s surge (down some 8%) no doubt influenced by the CME raising margins for traders by 18%. 

It was fun watching from the sidelines while it lasted, but now its back to buying stocks for more fundamental reasons – like free money dished out by central banks and governments, and watching the rollout of vaccines which support a more positive global economic outlook.

News overnight has been somewhat lacking but there will be interest in the Amazon and Alphabet earnings reports after the close. The S&P500 is currently up 1.7%, with the index recovering much of last week’s losses in the two trading sessions this week. The VIX index has below the 26 mark. The US 10-year rate pushed up towards the 1.12% mark, but has since retreated to just below 1.10%, still up some 2bps from the NZ close.

Following President Biden and other Democrat’s meeting with 10 Republican Senators to try to bridge the gap between his proposed $1.9t fiscal stimulus package and the alternative $0.6t package proposed by the Republicans, political analysts are suggesting that it was all show and no substance. The Democrats are likely to press on with trying to jam a large part of its plan through the reconciliation process.

Euro area GDP contracted by “only” 0.7% in Q4, a slightly better result than the most recent consensus estimate of 0.9% but much better than expectations of last week that sat closer to minus 2.0% before some partial country data were released. With lockdown restrictions imposed towards the end of last year and many still in place early 2021, the economy likely also contracted in Q1, before some recovery should emerge.

Despite the stronger than expected GDP data, the EUR’s fall has extended, as it approaches support around 1.20. The GDP release simply highlighted the euro area economy’s underperformance versus the US and the recovery view isn’t helped by the slow rollout of vaccines in the region, compared to the much faster rollout in the US.  This thematic has provided some overall support for the USD, with some short positions probably being closed. 

The AUD remains on the soft side after yesterday the RBA came up with a dovish surprise with its latest policy announcement on two fronts. Firstly, the Bank extended its QE programme by another $100b and kept the buying at $5b per week – a decision that wasn’t expected this early and larger than many estimates in the market for the extension. Secondly, even with a significant upgrade in its economic outlook, the Bank continued to set the bar high for any future interest rate increases, stating that “wages growth will have to be materially higher than it is currently” requiring “significant gains in employment and a return to a tight labour market” and that "The Board does not expect these conditions to be met until 2024 at the earliest" – a gutsy call for a central bank (like others) that hasn’t exactly covered itself in glory with its economic forecasting acumen over recent years.

The AUD immediately fell on the statement, unwinding its earlier rise in the day and losses extending overnight alongside broadly-based gains for the USD. The currency is currently down to 0.7580, down 0.5% from this time yesterday and the weakest of the majors. The implied yield on the 10-year bond future fell by 6bps to 1.12%, but that move has reversed overnight and is currently within ½ a basis point of the pre-RBA rate at the NZ close.

The NZD has largely been on the sidelines, jobbing around driven by movements in the USD. This saw it make a run towards, but not meeting, the 0.72 level overnight, before slipping back down to 0.7140. The GDT dairy auction was yet another positive one, with prices up 1.8% and making it more likely by the day that Fonterra’s payout is closer to the top of its range.

NZD/AUD has moved higher to around the 0.9430 mark. We might need a rethink on our NZD/AUD projections which saw the cross settling a touch lower from prevailing rates. There is a reasonable chance that a wedge opens up this year between the RBNZ and RBA policy outlooks. However, much will depend on the RBNZ’s reaction function and one takeout from the RBA release is that maybe the RBNZ is thinking the same and will also err to the dovish side.

In that respect, the day ahead will be an important one. With the RBNZ’s inflation mandate essentially met, focus turns to NZ labour market data to see progress in the Bank meeting its maximum sustainable employment mandate. The market consensus and the RBNZ expects that the unemployment rate rose from 5.3% to 5.6% in Q4. Weaker than expected figures would be largely ignored, as leading indicators point to an improvement in NZ’s labour market, but stronger than expected figures could see NZ rates push higher and support the NZD.

NZ rates were higher and steeper across the NZGB and swaps curve yesterday, with 10-year bonds up 9bps to 1.21% and swap up 5bps to 1.28% and the 2s10s spread up in the order of 4-5bps. Bonds underperformed swap ahead of the launch of the syndicated 2026 bond which could come anytime now. But the market was also influenced by expectations that the RBNZ doesn’t need to do any more work to simulate the economy. A reminder of that was the CoreLogic release showing galloping house price inflation (12.8% y/y), now timed to coincide with the 6pm TV news cycle to garner as much coverage as possible.

Also in the day ahead, RBA Governor Lowe could offer more colour on Australia’s policy outlook with a mid-afternoon speech.  Tonight, the key economic releases will be the US ADP employment and ISM Services index.