Financial markets have been quiet overnight. US equities show modest falls after the strong bounce in the prior session. UST10s have been range bound and the USD has been broadly weaker. The GDT dairy auction was a boomer, but with little impact on the NZD, which sits mid-pack and approaches the 0.73 mark.
There was a risk-off feel to markets in Asian trading yesterday, not helped by comments from China’s top banking regulator on concerns about a slew of risks, including the nation’s property bubble, rapid inflow of foreign capital and elevated global markets. This helped support the USD and JPY, but more than 12 hours later all is forgotten.
That said, US equity futures were weaker and the cash market has traded on a soft note as well, although a pullback from a strong prior session could easily explain that anyway. After Monday’s 2.4% gain in the S&P500, the index is currently down 0.2%. The US 10-year rate traded down a few bps to 1.40% around the time of the NZ close. In overnight trading a run up to 1.45% ensued, followed by a fall back down to 1.41%, so little net movement there.
In economic news, Q4 GDP in Canada was stronger than expected with a 9.6% annualised gain, following the 40.6% gain in Q3 and the flash monthly estimate showing a good start to the year through January. By contrast, German data were weak, with unemployment unexpectedly rising for the first time in eight months and retail sales plunging further in January, against expectations for a small rise after the plunge in December. The lockdown across the country has been at heart of the weaker economy. Chancellor Merkel meets with state leaders later today to discuss whether or not to extend the restrictions through to the end of the month, with some pressure on an earlier re-opening.
In currency markets, the dynamic has been a stronger USD through to early European trading and a subsequent decent fallback. The BBDXY index is now down 0.2% for the day and shows broadly based weakness. After falling to 0.7210 overnight, the NZD is currently approaching the 0.73 mark. The AUD is back up through the 0.78 mark and has outperformed. NZD/AUD saw some support just above 0.93 and currently sits at 0.9320.
JPY has shown the least improvement against the USD, with USD/JPY flat around 106.70. EUR and GBP are both up about 0.3% for the day to 1.2080 and 1.3970 respectively.
The latest GDT dairy auction results showed a massive 21% rise in whole milk powder to USD4364 a ton, its highest level in seven years. This helped drive the auction price index up 15.0%, to now be up over 39% y/y. Other prices showed smaller gains, including skim milk powder up 3.5%, butter up 13.7% and cheddar up 1.3%. The strong auction result puts further upside pressure to Fonterra’s payout for the season. The futures for the 2021 payout has been trending higher and closed at $7.42 yesterday, but that should rise further.
The auction result underpins the strong terms of trade dynamic that supports the NZ economy and valuations for the NZD. Data showed a 1.3% gain for Q4 but that doesn’t capture the surge in commodity prices we have seen this year. Our terms of trade adjusted purchasing power parity estimate of long term fair value for the NZD sits around the USD0.81-0.82 mark.
The Corelogic NZ house price index rose by 14.4% y/y in February, although that data lags the timelier REINZ data, which has also shown annual house price inflation just above 19%. RBNZ assistant Governor Hawkesby continued to run the dovish RBNZ view in a media interview, including a line that the Bank would like to see mortgage rates fall further. The implication is that the Bank would like to see an even bubblier housing market to help achieve its inflation objective. He added that the Bank is committed to a prolonged period of stimulus and reminded that the Bank could cut its OCR into negative territory or increase its weekly bond purchases if necessary. The market rightly ignored such comments.
The RBA’s policy update yesterday turned out to be fairly routine, with rates guidance unchanged and the Bank reiterating that conditions for a hike were not likely until 2024 at the earliest. Most interesting, there was no suggestion that the QE programme would be larger than the $100b indicated at this stage, after the step up in bond purchases on Monday to help contain long-term yields. This was characterised as a bringing forward of purchases, suggesting that in calmer bond market conditions, there might be a week or two of reduced bond buying activity, below the usual run-rate. This message saw the 10-year bond future rise by about 7bps in yield. Relative to the NZ close which preceded the announcement, that bond future is currently about 3bps higher in yield terms.
The NZ rates market showed little movement in yields, a relief from the volatile trading conditions seen of late. Some two-way flow was evident in the bond market, with the 10-year NZGB closing the day 1bp higher at 1.75%. Swap yields were 1-2bps higher.
Today sees the release of Australian Q4 GDP data, with our NAB colleagues seeing upside risk to the consensus estimate of 2.3% q/q. ADP employment and the ISM services index are the key US releases tonight.