Calmer conditions in the US Treasuries market overnight have encouraged equity investors to buy the dip, driving a strong rally, spurred on by a stronger ISM manufacturing print. Better risk sentiment has supported commodity prices, although there has been little follow-through of the recovery seen in the NZD and AUD during local hours. Given recent bond market gyrations, the RBA’s policy update later today will be more closely watched than usual.
More normal bond market conditions have been in play as the new week has begun, following the turmoil seen last week, in which the US 10-year rate spiked up above 1.60%. Since the NZ close, the trading range has been 1.395-1.45%, with the rate near the top end as we go to print and up 4bps for the day. Some curve adjustments have continued, with the 5-year rate down 1bp, the maturity which showed the most dysfunctional behaviour at the end of last week.
European 10-year rates are down in the order of 6-10bps. Bank of France Governor Villeroy de Galhau offered some dovish remarks to the market saying that to the extent that the tightening in financial conditions is unwarranted, “we can and must react against it”, by being active with the ECB bond purchases and strengthening forward guidance like being “ready to accept inflation above target for some time”, as the Fed has expressed. His comments came after the ECB released data showing that the pace of pandemic bond buying slipped during the turmoil last week, although this reflected some bond redemptions.
Fears of a further sharp rise in bond yields have subsided, so buyers have returned to the equity market, with strong increases across Asia, Europe and the US in the order of 1½-2½%. The key US benchmark indices are all currently trading at least 2% higher, with small caps and tech stocks outperforming, consistent with higher risk appetite.
The strong ISM survey helped to support market sentiment. The ISM manufacturing index rose by more than expected to reach a three-year high of 60.8, with gains across new orders, production and employment. The index was also inflated by an increase in “supplier delivery times” – a sign of constraints on growth, with shortages of semiconductors, for example, well publicised – but potentially a source of higher inflation pressure. The prices paid index rose to a 12½-year high of 86, reflecting the recent surge in commodity prices and indicative of rising inflationary pressure.
Germany CPI inflation was steady at a 1-year high of 1.6% y/y, with special factors recently driving the index higher rather than underlying inflationary pressure.
Higher risk appetite sees the commodity currencies leading the charge to begin the new week. The NZD opened the week on a positive note and pushed up to a high of 0.7293 last night, trading as low as 0.7225, before recovering back to 0.7270, near the level at the NZ close, up some 0.5% from the end of last week. Movements have been largely a mirror image of the USD BBDXY index, suggesting global factors and the big dollar in charge. The AUD has outperformed, up 0.8% to 0.7770, seeing NZD/AUD nudge down to 0.9350.
The other majors have shown smaller movements. With higher risk appetite, JPY has lagged, with USD/JPY up 0.2% to 106.80. EUR has also been on the soft side, given the lower rates backdrop with expectations of the ECB possibly stepping up its bond buying if the market misbehaves further. EUR is down 0.2% to 1.2050.
For the local rates market, the RBA’s operations were a key factor in driving rates lower across the curve and in doing so supporting bond market sentiment. The RBA announced that it would be purchasing $4b of bonds as part of its QE programme, twice the usual amount, in its effort to keep yields suppressed across the curve. The market understood the signal and drove a significant rally in rates, with the ACGB 10-year rate ending the day a massive 25bps lower at 1.67%.
Alongside Friday night’s rally in US Treasury yields, these global forces sent NZ rates down significantly. The 10-year NZGB closed the day down 15bps to 1.74%, after having traded just above the 2% mark on Friday. Bonds slightly outperformed swaps and there was significant curve flattening. The 2-year swap rate closed the day down 1bp to 0.47% while the 10-year rate fell 14bps to 1.86%.
The RBA’s monetary policy update comes this afternoon and yesterday’s QE operation leaves no doubt about its prevailing view. The rates market has been dysfunctional at times, with market participants testing the Bank’s commitment to keeping the 3-year rate at 0.1% (to be consistent with its view that the cash rate is unlikely to rise in the next 3 years). Expect another dovish missive by the RBA, keen on keeping rates suppressed for now and keeping the AUD in check (unsuccessfully so far). There will be some interest in whether the RBA extends YCC through to the November 2024 bond, which would solidify the Bank’s commitment to keep the cash rate unchanged for at least three years. Over $1b of yesterday’s buying was for this bond anyway, given that the yield trades well above the adjacent April 2024 bond.