Global bond yields lurched higher again on Friday, with the US 10-year yield reaching 1.64%, its highest level in more than 12 months. Equity markets were reasonably resilient to the sharp rise in bond yields, although tech stocks predictably underperformed (NASDAQ -0.6%). The USD strengthened across the board, except for the CAD which was boosted by a blockbuster employment report. The NZD finished the week back below 72 cents.
After spending most of last week consolidating just above 1.5%, the US 10-year Treasury yield experienced another big move higher on Friday. Bond yields came under upward pressure shortly after the NZ market close on Friday evening, with the 10-year yield breaking above technical levels, triggering heavy selling in Treasury bond futures. The upward pressure on yields was maintained as the session wore on, with the yield hitting a high of 1.64% and closing only a touch lower, at 1.625% (+9bps). The spread between US 2-year and 10-year yields increased 8bps and, at 147bps, is at its highest level in 5½ years.
Technical factors look at least partly to blame for the sharp rise in bond yields on Friday, although the broader economic backdrop is clearly pointing in the same direction.
On the Covid-19 front, vaccination, at least in the UK and US, continues apace. The US passed the 100m vaccine dose milestone on Friday, with US health expert Fauci speculating that life in the US should begin to return to normal in the late Northern Hemisphere summer / early autumn. Markets are braced for a surge in growth as restrictions are removed. The $1.9 trillion Biden fiscal stimulus will add to that growth momentum. Direct payments of up to $1,400 for most Americans were starting to be dished out on the weekend.
In US economic data, the University of Michigan’s consumer confidence index beat expectations on Friday, reaching its highest level since last March (although it remains well below its pre-Covid levels). In Canada, the monthly labour market report on Friday was a blockbuster, with employment growth more than three-times expectations and the unemployment rate dropping from 9.4% to 8.2%. Canada’s 10-year bond yield increased 15bps on the day, with the market now pricing a better than even chance the Bank of Canada will raise its cash rate by March next year.
Equity markets performed reasonably well given the bond market sell-off. The S&P500 (+0.1%) edged up to a new record closing high, with cyclically oriented stocks, such as industrials and banks, outperforming. The Russell 2000 index of small-cap stocks rose 0.6%, bringing its gain on the week to over 7%. Tech stocks, which are typically most affected when bond yields rise, underperformed. The NASDAQ opened almost 2% lower, although it recovered over the course of the session to finish down only 0.6%. The pending distribution of the $1,400 stimulus cheques (colloquially known as ‘stimmies’) undoubtedly helped support equity market sentiment. Market participants expect at least some portion of the cash handouts will be invested in stocks (relatedly, Bitcoin broke above $60,000 on the weekend, setting a new all-time high).
The USD rebounded on Friday. After three consecutive down days, the BBDXY index bounced back 0.3%, supported by the increase in US real yields (10-year real yield +10bps, to -0.65%).
The CAD was the star performer on Friday on the back of the exceptionally strong Canadian labour market report. The CAD was the only G10 currency to gain against the USD, appreciating 0.5% to its highest level in three years. The EUR, which had been sitting just below 1.20 on Friday morning, fell 0.3% to around 1.1950. News that Italy was going to return to lockdown, amidst a resurgence in Covid-19 cases in the country, didn’t help sentiment towards the EUR. Elsewhere, the JPY fell 0.5%, with USD/JPY closing at its highest level since June.
The NZD underperformed on Friday, for no clearly identifiable reason. The NZD fell 0.7% to around 0.7175, leaving it bottom of the currency leader board. The NZD/AUD cross continues to grind lower, closing at its lowest level since October last year, around 0.9245. Relative commodity price moves don’t look like they were to blame for the move in the cross last week, with iron ore prices falling on the week.
There wasn’t much movement in domestic rates on Friday, with the NZ market closing before the overseas bond market sell-off ensued. NZ wholesale rates will open sharply higher this morning as the local market plays catchup to the big moves in Australian and US rates after the NZ market close (the yield on the Australian 10-year bond future is about 11bps higher).
The RBNZ said it would maintain its QE bond buying pace at $630m this week. That’s the same pace as last week, but up from the $550m pace the week prior. The bond buying won’t stop yields increasing, just as it hasn’t done offshore, but it assists market liquidity in these circumstances by providing dealers with a liquidity outlet if they need to sell bonds.
The key event in the week ahead is the FOMC meeting on Thursday morning, at which the Fed will release updated economic and interest rate projections. According to a Bloomberg survey, most economists think the median Fed forecast will show the cash rate remaining on hold through the end of 2023, the same as December. Fed Chair Powell is also likely to be pressed on the recent rise in bond yields and whether the Fed would respond. But with financial conditions still exceptionally easy, the likelihood is that he maintains a similar line to his speech a few weeks back (acknowledging much of the increase in yields is due to ‘good news’ and it will likely require a sustained tightening of financial conditions and/or a return of disorderly market conditions to justify a more aggressive pace of bond buying). The Bank of Japan and BoE also meet this week. BoJ Governor Kuroda recently played down speculation that the central bank could widen the range around its 10-year yield target of 0%.
The highlight domestically is the release of NZ Q4 GDP on Thursday. We have pencilled in a 0.4% increase in quarterly GDP, although there is greater-than-usual uncertainty with this release (outturns of -1% to +1% are entirely plausible). In Australia, our NAB colleagues look for an above-consensus 50k increase in employment and a 0.2% fall in the unemployment rate, to 6.2%. Chinese activity data is released today and will show some eye-watering growth rates, owing to year-on-year base effects.
Retail sales is the highlight data-wise in the US.