US nonfarm payrolls much stronger than expected. Yields initially spike higher, before reversing. Equities rebound strongly, USD appreciates again. NZD falls towards 0.71 before rebounding with equities

The US nonfarm payrolls report, released on Friday night, was much stronger than expected.  After initially spiking higher, the US 10-year yield consolidated around 1.55%.  Equity markets rebounded while the USD continued to push higher, with the BBDXY making a three-month high.  With wholesale rates pushing higher in NZ, the RBNZ announced an increase to its bond buying for this week, although without much market impact on Friday.  Over the weekend, the Senate passed the huge $1.9 trillion US fiscal stimulus bill, albeit with some modest changes. 

The monthly US payrolls report was a strong one.  The US recorded 379k new jobs in February, almost double market expectations, while the unemployment rate ticked lower, to 6.2%.  Most the jobs growth in February came in the services sector (e.g. leisure and hospitality +355k jobs), as some states began to reopen.  This is a trend which should continue this year as Covid-related restrictions are eventually removed.  The unemployment rate remains much higher than its pre-Covid levels (3.5%) but the trend is clearly lower. 

Bond yields spiked higher, with the US 10-year yield reaching a fresh 12-month high of 1.62% shortly after the report.  But consolidation then set in, with the US 10-year yield falling back to 1.57%, around where it closed the previous session.  Still, the US 10-year yield was 16bps higher on the week, with investors factoring in a strong, fiscal stimulus-fuelled rebound this year and markets seemingly disappointed that Fed Chair Powell didn’t push back more forcefully against the rise in yields in a mid-week interview. 

Equity markets initially came under further pressure from the increase in Treasury yields.  At one point, the NASDAQ was down 2.6% leaving it briefly in ‘correction’ territory (i.e. more than 10% below its previous high).  But equity markets then staged a strong recovery, no doubt helped by the stabilisation in bond yields.  The NASDAQ ended the session 1.5% higher, trimming its loss on the week to 2.1%, while the S&P500 was up 2%.  All sectors of the S&P500 were in the green, with cyclical sectors (such as energy, materials and industrials) continuing to outperform. 

Oil prices had another big move higher on Friday, as the market continued to digest Thursday’s news that OPEC+ and Saudi Arabia wouldn’t increase oil supply in April.  Brent crude oil rose 3.7%, to almost $70/barrel, in sight of its highest level since mid-2019.  Other commodity prices were mixed, with copper and iron ore prices pulling back slightly, albeit from what were close to multi-year highs. 

The USD continued its recent resurgence, with the BBDXY index pushing up 0.3%, to a three-month high.  Several factors appear to be behind the rebound in the USD this month.  First, US Treasury yields have risen more quickly than most global peers as the market expects the massive Biden fiscal stimulus to turbocharge US economic growth this year.  The US vaccine roll-out has also been impressive, trailing only the UK amongst major economies in terms of speed.  Second, the pullback in equity markets over recent weeks has benefited the USD, which typically performs well during periods of heightened risk aversion.  Finally, USD weakness was a widely held consensus view, so some USD short covering amongst investors has no doubt aided the move. 

The EUR fell 0.5% to 1.1915, its lowest level since late-November, while USD/JPY moved up to its highest level since last June, above 108.  The CAD (+0.1%) and NOK (+0.3%) were the two best performers and the only G10 currencies to appreciate against the USD on Friday, reflecting the sharp rise in oil prices.   The NZD fell as low as 0.71 on Friday amidst broad-based USD strength, before rebounding to around 0.7165 as equity markets recovered.  On the week, the NZD was still down almost 1%.

In other news, BoJ Governor Kuroda said he didn’t think it would be appropriate to widen the range around the central bank’s 10-year yield target.  Markets had been speculating that the BoJ could announce a widening of the band, which currently sits at +/-20bps around the 0% target, as part of its monetary policy review later this month.  The 10-year Japanese government bond yield fell 4bps, to 0.1%, in response to the comments. 

NZ wholesale rates had another meaningful shift higher on Friday, increasing by between 2bps (2-year swap rate) to 5-6bps (5- and 10-year swap rates).  The NZ 10-year swap rate closed the week at 2.07%, back near its recent 18-month highs. Again, it was a case of NZ rates responding to global forces, rather than any NZ-specific factors behind the move (Australian rates were up a similar amount).  The yield on the Australian 10-year bond future has fallen around 6bps from the time of the NZ market close, so NZ wholesale rates may open lower this morning.   

On Friday, the RBNZ announced an increase to its bond buying pace for this week, taking its target from $570m to $630m.  The shift follows comments last week from Assistant Governor Hawkesby that the Bank had the flexibility to adjust the purchase pace in response to market conditions.  The market reaction was limited, with the RBNZ choosing to increase the purchase amounts of shorter-dated (sub 5-year) bonds, for which the impact on yields is less pronounced (compared to the long-end). 

In news over the weekend, the Senate passed the huge $1.9 trillion fiscal stimulus bill, albeit with some last-minute modifications.  After negotiations with centrist Democrat senators, the top-up to unemployment benefits, which will be extended until September 6, was scaled back from $400 to $300 per week.  The bill now goes back to the House, which has scheduled a vote for Tuesday, and then Biden, for his signature.  The Democrats want it enacted by March 14, when the current unemployment benefit top-ups are due to expire. 

In terms of the domestic data for the week ahead, there are more economic activity indicators which will help us refine our Q4 GDP forecast, which is currently +0.7%.  There is also the preliminary release of the ANZ business survey.  The February ANZ survey showed surging cost pressures and pricing intentions among businesses.  Overseas, RBA Governor Lowe is speaking on the topic of “The Recovery, Investment and Monetary Policy” on Wednesday and the ECB meeting is Thursday night, where it is expected to keep its policy settings unchanged.  CPI on Wednesday night is the highlight data-wise in the US.