Friday saw more volatility in bond markets, although this time it was yields moving sharply lower. The US 10-year yield fell back to 1.4%, having traded as high as 1.6% on Friday morning. Meanwhile, equity markets weakened (the NASDAQ an exception), commodities fell, and the USD strengthened sharply. The NZD and AUD fell around 2% on Friday. In news over the weekend, Auckland is back in a Level 3 lockdown for a week and the rest of the country Level 2. The snap lockdown may temper the market’s recent shift towards pricing OCR hikes in 2022.
Bond market volatility remains very high, both in NZ and offshore. Only minutes after we sent this report on Friday, the US 10-year Treasury yield broke above 1.5%, triggering a wave of stop-losses that briefly pushed the yield to as high as 1.6%. But there was a decent turnaround in bonds on Friday night, with the US 10-year yield falling back to 1.4%. Likewise, the yield on the Australian 10-year bond future is about 20bps lower than at its local market close, at 1.72%. Month-end rebalancing was one technical factor supporting the move lower in yields on Friday.
Again, there weren’t too many new developments to explain the price action. US Congress passed the huge $1.9 trillion (~9%/GDP) fiscal stimulus bill on Saturday and it now moves on to the Senate, where the Democrats have a wafer-thin majority, for approval. The US administration is hoping to pass the stimulus bill by mid-March, when enhanced unemployment benefits are set to expire. In economic data, there was a big jump in US personal income in January, due in part to the $600 cheques sent to households as part of the last stimulus package, which boosted the US personal savings rate to an exceptionally high 20.5%. The extremely high level of US household savings, which will get bigger still if the $1.9tn proposed fiscal stimulus bill passes, is one reason some economists expect a wave of pent-up spending when the economy reopens. Elsewhere, the US FDA granted approval to Johnson & Johnson’s single shot Covid-19 vaccine in the next few days, making it the third vaccine to win regulatory approval in the US.
Other asset markets traded with a ‘risk-off’ tone on Friday. The S&P500 was down 0.5% on Friday (2.5% on the week), dragged down by big falls in the energy and financials sectors. Equity markets in Europe were down by 0.5%-1.5% while the Nikkei fell 4%, albeit from what was close to a 30-year high. The NASDAQ (+0.6%) was one of the few equity markets to manage a gain on Friday, helped by the reversal in bond yields, although that only trimmed its loss on the week to 4.9%. After their recent strong run-up, commodities also fell back on Friday amidst an increase in risk aversion and appreciation in the USD. Copper fell 3.6% although, at over $9,000/tonne, it remains at its highest level since 2011, while Brent crude oil fell 2.5%.
The USD was stronger across the board on Friday, gaining 0.7%-0.8% in index terms. The increase in risk aversion supported the USD while unwinds of speculative USD short positions may have been another factor (CFTC data continue to show speculative investors are heavily short).
The EUR fell back from above 1.22 on Friday morning to close the week at around 1.2070. Safe haven currencies outperformed, with the JPY and CHF only down around 0.4% on Friday. The GBP (-0.6%) also performed reasonably well, helped by some hawkish comments from BoE Chief Economist Haldane. Haldane warned that central banks may be too complacent on inflation and there was, in his view, “a tangible risk inflation proves more difficult to tame” and monetary policy may need to be tightened more aggressively than markets are pricing.
Commodity and risk sensitive currencies were the big underperformers. The NZD and AUD were down around 2% on the session amidst the falls in commodity prices and broader risk-off backdrop. The NZD, which traded above 0.7450 on Thursday night (its highest level since April 2018), finished the week down around 0.7230.
The big local news over the weekend has been the discovery of two new Covid-19 community cases in Auckland, which has led the government to move Auckland to a Level 3 lockdown for a week and the rest of the country up to Level 2. Given one of the cases had visited “well populated” places over the past week, there is a clear risk of more community cases popping up and the lockdown being extended beyond a week. The lockdown news may temper the market’s recent shift towards pricing OCR rate hikes as soon as mid-next year.
It was another wild day in the local rates market on Friday, with huge moves in both directions. Swap rates initially opened sharply higher once more, with the 2-year swap rate trading up at almost 0.6% at one stage (+8bps) and the 10-year swap rate 2.19% (+20bps). But as the Australian market started to turn around, helped by another upsized $3b three-year bond buying operation by the RBA, wholesale rates in NZ then headed lower. By the closing of trading, the 2-year swap rate was back down to 0.48% (-4bps), while the 5 and 10-year swap rates were essentially unchanged, at 1.2% and 2% respectively. Stepping back though, wholesale rates were still substantially higher on the week, by between 10 and 40bps. The 10-year swap rate is at its highest level since 2019.
Comments from Governor Orr in a speech on Friday aided the turnaround in NZ rates on the session. Orr firmly pushed back against suggestions that the recently announced change in the RBNZ’s monetary policy Remit might affect how it conducts policy. Orr reiterated that the MPC was “only focused” on its primary targets, of inflation and maximum sustainable employment. That fits with our initial take which was the Remit change is unlikely to fundamentally alter the monetary policy outlook.
There’s plenty on the agenda in the week ahead. Locally, the highlight is Governor Orr’s speech on Thursday on “The Future of Monetary Policy. ” In the US, the ISM surveys and nonfarm payrolls are released, with the market looking for a pick-up in jobs growth in February (+180k expected). In Australia, our NAB colleagues are looking for an above-consensus 2.9% increase in Q4 GDP (+2.3% expected) while the RBA meeting on Tuesday will also be closely watched to see if the central bank pushes back against the recent Aussie bond market sell-off. The Chinese Caixin PMI comes out today. The official Chinese non-manufacturing and manufacturing PMIs released over the weekend showed some further slowing in activity, although they may have been affected by the timing of the Lunar New Year holidays