It has been an uneventful day for financial markets, with US equities consolidating recent gains, US 10-year yields nudging lower, and small movements in currencies. The NZD has been the weakest of the majors overnight, giving up a little of the gain seen during the local trading session.
After six positive trading sessions which saw the S&P500 close at a record high, the index is showing signs of consolidation. After spending the morning session in negative territory, the index has just turned positive as we go to print. The economic calendar is sparse this week, with tonight’s US CPI release of some interest, but not much else to note. After almost touching 1.20% in the previous overnight session, the US 10-year yield has slipped to the 1.14-1.15% mark.
In COVID19 news, the US reported fewer than 100,000 new cases for a second consecutive day, with figures for Sunday and Monday both below 90,000, continuing the rapid decline in trend. In early January the rolling 7-day average peaked around the 250,000 mark. More than 10% of US residents have now been vaccinated. The WHO said that COVID19 most likely entered humans through an animal and not from a leak at a lab, a line that conspiracy theorists had been running. The WHO also expressed confidence that the AstraZeneca vaccine can prevent severe cases of COVID19 and hospitalisations and deaths, despite questions about its efficacy against the South African variant.
China credit data were strong, with the nearly CNY3.6 trillion of new loans written a record high and aggregate financing of nearly CNY5.2t trillion, some 12% ahead of expectations. The data play to the Chinese economic recovery theme, while slightly slower growth in money supply was consistent with the PBoC attempting to tighten liquidity conditions. CNY was boosted after the release, seeing USD/CNY back down towards the bottom of its recent range at 6.4350.
Italian 10-year bond yields fell to a record low of just under 0.50% on optimism that Draghi, who has near unanimous support to become the next Premier, will save the country from economic ruin. He told lawmakers that he’ll make a common EU Budget a policy priority and he has outlined a programme focused on Italy’s €209b share of the EU Recovery Fund, with more investment and fiscal reform. Draghi’s support is likely one factor in boosting EUR, which has pushed up through 1.21 after its move sub-1.20 late last week.
Relative to this time yesterday, the USD is broadly weaker, with its weakness through NZ trading yesterday extended overnight, with the NZD being the exception. Lower rates have helped support JPY, with USD/JPY down 0.6% for the day to 104.60.
Yesterday, the NZD managed to spend a few hours above the 0.7250 level, roughly where it closed, but despite further broadly-based USD weakness, the NZD has slipped back down to 0.7230. The AUD has managed to sustain levels around 0.7730, seeing NZD/AUD slip to 0.9360, now below the level seen prior to the RBA’s dovish musings last week and the strong NZ employment report – the market ignoring the rise in nominal NZ-Australia interest rate spreads. Rate spreads are apparently playing second fiddle to the wider macro themes of the global recovery, led by China, and Australia’s outperforming commodity price dynamic versus NZ.
The rise in NZ rates remains relentless against the backdrop of convincing evidence that NZ inflationary pressure is to the upside. In the latest observation consistent with that theme, the RBNZ’s survey of expectations showed inflation expectations higher across the board, with some chunky gains in the short-term measures – the 2-yr ahead measure approaching the 2% mark again.
The NZGB and swap curves moved higher and steeper, some of that reflecting a catch-up after the Waitangi Day public holiday. The 10-year rates were both up 5bps to their highest levels in almost a year.
Early in the day, the RBNZ announced that the higher LVR restrictions due to take effect 1 March will be extended for “investors” so that from 1 May banks will be restricted to writing a maximum of 5% of new lending at LVRs above 60%. Recently, three of the four main trading banks have already initiated internal policies that reflect this anyway so the RBNZ’s new policy won’t change behaviour. Finance Minister Robertson said that he will announce a rolling series of measures to address the housing crisis starting with demand side measures later this month.