Bond market sell-off resumes, with US 10-year breaking back above 1.5%. Market seemingly disappointed Powell didn't push back more firmly on yield rise. Equities lower, USD higher. 10-year swap rate back to 2% as NZ tracks Aussie rates higher

The bond market sell-off has resumed, with the US 10-year Treasury yield breaking back above 1.5% in the last hour as Fed Chair Powell was speaking.  The market was seemingly looking for Powell to push back harder on the recent increase in yields.  Equities turned down and the USD appreciated as US yields rose.  The turnaround in the USD has pushed the NZD down below 0.72.  Elsewhere, oil prices spiked higher after OPEC+ decided not to raise output next month.

Powell gave an interview as part of the Wall Street Journal Jobs Summit in the past hour.  Powell reiterated a number of familiar dovish themes, including that the Fed was a long way from achieving its goals and there was “a lot of ground to cover” before it would be appropriate to tighten policy.  Echoing comments from Fed Governor Brainard from a few days ago, Powell said recent bond market volatility had “caught my attention”, adding that the Fed would be concerned if financial conditions tightened or there were disorderly market conditions. Those comments suggest the Fed might be prepared to increase its bond buying if market conditions worsen or risk asset markets fall sharply, but for now he saw the current policy stance ($120b per month in bond buying) as appropriate.

The market was seemingly looking for Powell to push back more firmly on the recent increase in US yields.  As Powell spoke, the US 10-year Treasury yield broke above 1.5%.  Markets are still in flux, but as we write this it is currently trading at 1.54%, 6bps higher on the day and approaching the highs set last week, of 1.6%.  Equities turned lower as yields rose, with tech stocks underperforming again.  The NASDAQ is down 2.1% and the S&P500 down 1.3%, both making new lows for the day.  The USD also appreciated, benefiting both from the increase in US real yields and the pickup in aversion.   The BBDXY USD index is up 0.5% on the session and has traded at a one-month high.  The EUR has broken back below 1.20 and the NZD has fallen from around 0.7270 before Powell spoke, to now be below 0.72.

Moving on to other developments, the Biden administration has reportedly agreed to tighten the eligibility for those who will receive $1,400 cheques as part of the stimulus package.  The compromise is aimed at appeasing centrist Democrats whose votes are needed to ensure the bill passes the Senate. The proposed change is only expected to lower the cost of the $1.9 trillion fiscal package by around $12b, so it’s unlikely to derail the ‘reflation trade’ that has taken hold in markets.  The Senate is expected to start voting on the package over the next day or so, with a vote on the bill possible by the weekend.

Oil prices have shot higher, with Brent crude oil reaching $67/barrel (+5%), its highest level since the start of 2020.  The spike in oil prices followed reports that OPEC+ had decided to keep oil production unchanged in April with Saudi Arabia maintaining its own voluntary supply cuts next month.  There had been some expectation that OPEC+ might increase output from next month, as it gradually unwinds its big supply cuts from last year.  Comments from Saudi Arabia’s oil minister, that the country was in “no hurry” to restore its voluntary cuts, added to the upward pressure on oil prices.  Unsurprisingly, the oil-sensitive CAD has been the two best performing currency over the past 24 hours and is the only G-10 currency not to have fallen against the USD.  

Volatility returned to the NZ and Australian interest rate markets yesterday, with another large increase in long-term rates and government bond yields.  The market was seemingly disappointed by the RBA’s decision to revert to a $2b buyback of Australian government bonds under its QE programme, after it upsized its purchase amount to $4b earlier in the week.  The RBA also passed up the opportunity to buy 3-year bonds under its Yield Curve Control policy. Australia’s 10-year yield rose 10bps on the session, to 1.78%, which dragged NZ rates up with it.  The NZ 10-year swap rate rose 11bps, to back above 2%, while the short-end of the NZ curve also moved higher, with the 2-year swap rate rising 4bps, to 0.54%.

There wasn’t anything market moving in Governor Orr’s speech yesterday.  Orr took the opportunity to reiterate that the recently announced change to the MPC’s monetary policy Remit would have no impact on how it sets policy, which remains “solely focused” on achieving its inflation and employment objectives.

In other local news, yesterday we raised our forecast for Fonterra’s 2020/21 milk price to $7.70, from $7.40.  While there is uncertainty around the precise number, current conditions certainly suggest a material improvement on last season’s $7.14.

There are a few things to focus on in the day ahead.  The NZ government will review the Covid alert levels today.  There have been no new Covid-19 community cases for four days running, raising the possibility that there might be some loosening of the alert levels ahead.  The current alert levels (Level 3 for Auckland and Level 2 for the rest of the country) were initially set to run until Sunday. There will also be focus in the rates market on the RBNZ’s week-ahead bond buying schedule at 2pm.

The monthly payrolls report is released tonight, with the market looking for a bounce back in employment growth in February (+195k) and a steady unemployment rate (6.3%).  We suspect the market will be inclined to look through a weaker number, with investors looking ahead to the big fiscal stimulus planned in the US and the eventual removal of Covid-related restrictions later this year.