Global bond rates have shown chunky gains overnight, with the market staring in the face of higher than expected UK debt issuance following the Budget and inflationary pressure in the US. This looks to have impacted equity market sentiment, with a modest fall in the S&P500 and the tech sector underperforming. Currency moves have been small overnight, but with the NZD at the bottom of the leaderboard.
Focus has returned to the bond market overnight, with large gains across the board in the order of 7-9bps for 10-year rates across the UK, Germany and US. The US 10-year rate has trended higher throughout the overnight session, rising as much as 9bps to a high of 1.495%, before peeling off a little – about one third of the rise driven by inflation break-evens and two-thirds by real rates.
The move higher was seemingly led by the UK, after the Budget announcement, with further upside impetus despite soft US activity data – the market perhaps paying more attention to the rise in the “prices paid” inflation indicator for the services sector. European rates might also have been impacted by a Bloomberg report that according to insiders, ECB policy makers are downplaying concerns over rising bond yields, suggesting they can manage the risk to the euro-area economy with verbal interventions. The ECB meets next week and is expected to leave the massive pandemic bond buying programme unchanged.
In the UK Budget, Chancellor Sunak was balancing off further spending to support the economy as the economy begins to recover from the pandemic and the need to get the deficit under control. The furlough wage support programme will be extended through to September, although with a phasing out beginning from July, with businesses contributing incrementally more as they reopen. On the revenue side, some current tax relief will remain in place for a little while longer, but the corporate tax rate will rise from 19% to 25% from 2023 and income tax thresholds will be frozen, meaning higher effective personal tax rates as incomes rise over time.
However, what seemingly got the market’s attention was the UK Debt Management Office looking to sell £296b of bonds in FY21/22, almost £50b higher than the market expected, driving rates higher.
US economic data for February were weaker than expected, with the ADP employment report soft at 117k and the ISM services index some 3½ points weaker, down to a nine-month low of 55.3, possibly driven down by the polar blast during the month. On the inflation side, the prices paid index surged further to a 12½-year high of 71.8 – consistent with headline PCE inflation well above the 2% mark, perhaps closer to 3%.
There is also some focus this week on Biden’s massive $1.9 trillion fiscal relief package, which is up for negotiation in the Senate, having already passed the House last weekend. The inside word from a Democratic aide is that eligibility for the direct $1400 payments will be tightened up a little, with the income cap for individuals reduced from $100k to $80 and from $200k to $160k for households. Still, there is wide perception in markets that much of the fiscal stimulus is unnecessary at this juncture, with the earlier $900b package agreed late last year supporting growth early into 2021, so further stimulus just adds to inflationary concerns and a growing debt burden.
The rising rates backdrop has driven a cautious tone for equity markets, with the S&P500 currently down 0.4%, with long-duration sectors like IT and Utilities dragging the chain. The Nasdaq index is currently down well over 1%.
Currency markets have been unperturbed by the jump higher in rates. Overnight moves have been contained to within 0.1% against the USD, but with slightly larger falls than that for the AUD and NZD. The NZD is the worst of the majors, slipping briefly below 0.7240 and now currently 0.7250, down around 0.5% from the NZ close.
The AUD slipped back below 0.78, down about 0.3%. NZD/AUD took a peek below 0.93 and currently sits just near that mark. Yesterday, stronger than expected Q4 GDP of 3.1% q/q for Australia wasn’t a market mover. However, the data suggest that Australia is catching up to New Zealand in this recovery phase and we expect this theme to continue. NZ’s greater exposure to global tourism is one factor, while the current NZ lockdown and the NZ government’s proclivity to lockdown on small outbreaks of COVID19 is another. This dynamic is one factor we see holding back performance of the NZD/AUD cross rate this year.
With its modest underperformance, the NZD is down slightly on all the key crosses. CAD is the best overnight performer, supported by oil price gain in the order of 3%, with Brent crude around USD64.50.
Yesterday, the domestic rates market saw small declines across longer term NZGBs, with the LSAP showing poor offers, particularly for the 2041 bonds. By contrast, the swaps market saw modest upside pressure in rates. The 10-year NZGB fell by 1bp against a 3bps rise in the 10-year swap rate. The overnight global bond selloff, including the 10-year Australian bond future up some 5bps in yield since the NZ close, will set the tone for trading today.
RBNZ Governor Orr will be speaking on a webinar this morning on the topic of “Some of the policy lessons the Reserve Bank has learned during COVID-19”. Global economic releases are second-tier, with the pick of the bunch being the weekly jobless claims update in the US.