Big gains in equity markets again. US 10-year consolidates around 1.5%. ECB says it will front-load bond buying, but keeps QE program size unchanged. NZD moves above 0.72 amidst broad-based USD weakness

Markets have traded with a risk-on tone overnight, with the S&P500 rising to a new all-time high and the NASDAQ up over 2.5%.  The ECB left its policy settings unchanged, as expected, but said it would frontload its bond buying next quarter, driving a fall in peripheral European government bond yields.  The EUR briefly dipped after the ECB, but it has reversed that move and now sits higher on the day.  The NZD has pushed above 0.72 amidst broad-based USD weakness.

It’s been another positive session for equity markets overnight, with big gains in the main US benchmarks.  The NASDAQ continues to recover from its recent sell-off, which saw it enter ‘correction territory’ earlier this week, with bond yields showing signs of stabilising.  The NASDAQ is up 2.7%, taking its gain this week to almost 4%.  The S&P500 is up around 1.4% and has made a fresh all-time high.  So, far all the talk from some central banks about bond yields potentially threatening the recovery, financial conditions remain exceptionally easy.

One of those central banks is the ECB.  The key takeout from the ECB meeting overnight was that it will ‘frontload’ its QE bond buying in the coming quarter, although it chose not to increase the overall size of the programme at this stage, which remains at €1.85tn.  Reuters reported that it would increase its bond buying next quarter well above the current €60b/month pace, but not as high as the €100b/month rate seen earlier last year, during the height of the crisis.  In the press conference, Lagarde warned that higher bond yields could lead to a “premature tightening of financing conditions”, which she labelled “undesirable .”  The ECB’s forecasts for inflation show it missing its 2% target for the entire forecast horizon, with CPI only seen reaching 1.4% by 2023.  Risks were judged to be more balanced in the medium-term while still skewed to the downside in near-term.

European bond yields fell in response to the ECB’s pledge to increase the pace of its bond buying.  The German 10-year bund yield fell as much as 6bps, before reversing most of that move, to close at -0.33% (-2bps on the day).  The real movers were in the periphery, which are the primary beneficiaries of the ECB’s bond buying.  Italy’s 10-year yield fell 8bps, to 0.6%, and the spread to Germany tightened back towards its recent lows.

The ECB’s currency impact was short-lived.  The EUR fell from around 1.1960 pre-ECB to just below 1.1930, before turning higher as the USD weakened across the board.  Frontloaded bond buying, in the context of an unchanged overall programme, was always going to have a greater impact on bond yields than exchange rates.  The EUR trades this morning around 1.1990, up 0.5% over the past 24 hours.

The US 10-year yield continues to consolidate around the 1.5% mark.  The 10-year yield dipped below 1.5% overnight but it has recovered over the last few hours ahead of a $24b US 30-year bond auction (which passed without incident moments ago).  Adding to the upward pressure on yields, US telco Verizon brought a multi-tranche bond deal to market, reportedly $25b in size, which would make it one of the largest corporate bond deals of all time.  The record bond supply is going to keep coming, with Biden scheduled to sign the $1.9tn stimulus bill into law today, setting the stage for even larger auction sizes.

The soon-to-be-enacted Biden fiscal stimulus and higher oil prices (Brent crude +2%) has helped US inflation expectations make new multi-year highs.  The 10-year ‘breakeven inflation rate’ in the US has pushed up to 2.29%, its highest level since 2014, with the market looking through yesterday’s lower-than-expected CPI release.

The USD remains on the back foot, with the Bloomberg DXY down 0.5% overnight.  The BBDXY has fallen over 1% over the past three trading sessions, all-but erasing its gains from last week.  The recovery in risk appetite and pullback in US real yields look to be behind the fall in the USD this week.

All currencies bar the safe-haven JPY have risen against the USD overnight, although the moves haven’t been large.  The NZD is up around 0.4% and has pushed through 0.72 overnight.  The NZD/AUD cross continues to grind lower and, at around 0.9280, is at a three-week low.

In economic data, US jobless claims were lower than expected last week, with the labour market showing further signs of recovery.  Rapid improvement in the labour market is expected as Covid-related restrictions are removed, and the economy reopens this year.

Locally, there was another chunky fall in NZ swap rates and government bond yields yesterday, with both curves flattening. Government bond yields fell by as much as 9bps while swap rates were 2-7bps lower on the day. The move in bonds was aided by a very strong bond tender from New Zealand Debt Management, which cleared several basis points below secondary market yields at the time. The 10-year government bond yield has fallen 20bps this week alone, although this move should be seen in the context of the 60bp increase the four weeks prior. 

All eyes will be on the RBNZ’s 2pm announcement today, when they will release their schedule of bond buying for the week ahead. Last week, the RBNZ chose to increase its bond buying from $550m to $630m. It will be interesting to see whether the RBNZ maintains this pace in light of what appears to be renewed demand from bond investors.