The USD is modestly stronger while US equities and US Treasury yields are modestly lower overnight. These trends were in play ahead of a huge surprise in the strength of US retail sales and the report extended those market movements, although not by much. This sees the NZD trading sustainably below 0.72.
After a disappointing run over recent months, US retail sales showed a massive upward surprise in January, up 5.1% m/m against expectations of 1.1%. Core sales were also much stronger, rising by over 6%. The stronger bounce-back came directly after the last $900b stimulus relief package was signed off, so it is tempting to conclude that households responded quickly to the payments received. One other possible factor is that seasonal adjustment factors have been screwed by the pandemic and that the figures overstate the true increase in spending.
Other US data were also stronger than expected, with core PPI inflation up 1.2% for the month, strong industrial production and the NAHB housing index also beating expectations. It all points to the US economy not being as weak as expected, despite some widespread restrictions still in place. One might also wonder what another $1.9 trillion stimulus package might do to the economy, with significant risk of overheating and potentially higher inflation.
One might have expected US Treasury rates to push higher after the reports. But the US 10-year rate is down to 1.27-1.28%, after touching its highest level in a year yesterday of 1.33%. Perhaps some sign of exhaustion after significant selling pressure and a backdrop of weaker US equities might have lent some support to the bond market. After the recent strong run in equities, S&P futures were weaker going into the retail sales report and the strong report didn’t help. The S&P500 is currently down 0.4%.
The USD was heading north pre retail sales and the report saw that move sustained, although movements haven’t been particularly large, with the BBDXY index only up 0.3%. The NZD went sub-0.72 during the local trading session, coming under the pressure of higher US rates, and a further small fall was seen overnight, down to a low of 0.7158 and currently 0.7185. The AUD is also on the soft side, trading at 0.7750. NZD/AUD has continued to trend lower, falling as low as 0.9263 earlier this morning.
The lower global rates backdrop sees JPY as the best performer. After trading as high as 106.22 yesterday, USD/JPY is down to 105.80 and seeing NZD/JPY back below 76.
In other news, the WSJ reported that Saudi Arabia plans to increase oil output in the coming months, reversing a recent big production cut, a sign of growing confidence over an oil price recovery. The sources say that no final decision has yet been made, ahead of the next OPEC meeting, and production cuts wouldn’t begin until April. After pushing as high as USD64.75, with the cold snap in the US in the driving seat, Brent crude fell 2½% on the Saudi report, before settling around USD63.75, still up for the day.
Higher US rates in the previous session and during local trading hours saw significant upward pressure on NZ rates. The NZ 10-year government bond finished the day 9bps higher at 1.52%, underperforming the swap market, where the 10-year rate rose 6bps to 1.62%. With the short end underpinned by expectations of steady monetary policy for at least another year, this resulted in further curve steepening. The 2s10s swap curve is approaching its highest level since 2014, largely driven by global forces.
In the day ahead, FOMC meeting minutes aren’t likely to reveal anything new, following the plethora of Fed speakers over recent weeks. Australian employment should show a decent gain for January, dragging down the unemployment rate further to 6½% or even slightly lower, on NAB’s estimate. US jobless claims tonight are expected to show a further nudge down.