sign uplog in
Want to go ad-free? Find out how, here.

Slight improvement in risk sentiment pushes US equities and UST yields higher. Oil bounces back. Significant falls in NZ mid-long term rates on global forces and less debt issuance ahead

Slight improvement in risk sentiment pushes US equities and UST yields higher. Oil bounces back. Significant falls in NZ mid-long term rates on global forces and less debt issuance ahead

Risk sentiment has improved a little from the previous trading session, with US equities showing gains, US Treasury yields nudging higher and oil prices recovering yesterday’s large losses. Currency movements have been modest. Since the NZ close, the NZD has tracked sideways and is flat after printing a fresh low.

Markets remain in a consolidation mode, evident in a see-sawing pattern of late for US equities and Treasuries.  Today’s offering sees the S&P500 up 0.4% with cyclicals back in play and IT out of favour. After falling to as low as 1.59% an hour or so after the NZ close, the US 10-year rate has trended higher and is back up to 1.63%.

Fed Chair Powell and Treasury Secretary Yellen are in front of lawmakers for a second day, but nothing new has emerged.  Germany backed down on the proposed harsh 5-day lockdown scheduled over the Easter period not much more than a day after announcing the measure to help curb the spread of COVID19. Chancellor Merkel apologised, calling the proposal a mistake, but it provides further fodder to the critics of Europe’s strategy in fighting the virus, in addition to the slow rollout of vaccines across the EU.

There was plenty of overnight economic news, but market reaction was only temporary. The strongly positive surprise in European versus US data went against the narrative that the US economy is performing relatively better, but even that couldn’t arouse markets.

European PMIs for March were much stronger than expected across the board. While these were expected to be broadly flat, held back by lockdowns, both manufacturing and services readings were much higher across both the euro area and the UK. Pricing indicators also increased, with input costs at their highest level in a decade and selling prices at a two-year high. Still, fresh lockdowns suggest that economic recovery expectations have been pushed out a bit across the region and market reaction to the figures was muted.

US Markit PMIs were close to or slightly softer than expectations, in contrast to the much stronger European PMIs. Concerns about inflation haven’t gone away, with the US prices paid series accelerating to a record high, not helped by supply disruptions, alongside the increasing inflationary backdrop.

The run of negative US economic surprises continued, with durable goods orders unexpectedly falling in February for the first time since April, although once again the mid-month storm is being blamed for the shortfall, even if some consolidation was due after a strong recovery.

UK CPI inflation figures were much weaker than expected, the core figure some 0.5 percentage points lower at 0.9% y/y. The shortfall was blamed on an unusual drop in clothing and footwear prices, which usually rise in February, so is seen to be temporary, and not swaying expectations for a pick-up in inflation.

Oil prices have bounced back strongly, attributed to signs of stronger gasoline demand in the US and possible supply disruptions as a container ship is stuck sideways in the Suez Canal, blocking the passage. Brent crude has recovered nearly all the previous day’s 6% loss, trading back above USD64 a barrel.

In currency markets, movements have been modest, all within plus or minus 0.3% against the USD from the NZ close. The NZD printed a fresh low of 0.6956 but has largely tracked sideways around the 0.6980 level seen at the NZ close. Despite recent underperformance, we remain positive on the outlook for the rest of the year – the global reflation story still looks compelling in our view assuming that the spread of COVID19 is under control and the global vaccination rollout proves successful.

The AUD found some support around the 0.7585 level and has recovered to regain a 0.76 handle. NZD/AUD has tracked in a 0.9150-0.92 zone.

The NZ rates market had another massive day, with big falls in mid-long term rates, driven by both global and domestic forces. NZ Debt Management announced its tender schedule for April, which showed a reduction in issuance of $150m per week to $300m-$350m (the latter figure reflecting linkers remaining at $50m per fortnight) and slightly less duration, with the 2041s removed from the schedule. A new 2032 bond will be syndicated in May, rather than April, later and a shorter maturity than expected. In a market that was apparently short duration, the announcement led to a strong rally in NZGB yields, alongside the tailwind provided from global forces.

We expect the RBNZ to lower its weekly bond buying pace from next week by at least $150m to account for the lower rate of issuance. The Bank’s increase in QE pace earlier this month has been instrumental in squeezing rates lower and more evidence of that was gleaned yesterday when the RBNZ only accepted $52m of the targeted $120m of 2025 bonds.

The 10-year NZGB fell by a massive 17bps to 1.51%, taking its fall this week to 30bps, outperforming swaps which fell by “only” 15bps to 1.72%. The 2-year swap rate fell by 2bps to 0.40%, a further small reduction in the afterglow of the government’s new housing policy announcement.

Daily exchange rates

Select chart tabs »

The 'US$' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The 'AU$' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The 'TWI' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The '¥en' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The '¥uan' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The '€uro' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The 'GBP' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The 'Bitcoin' chart will be drawn here.
Loading...
End of day UTC
Source: CoinDesk

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

1 Comments

The 10-year NZGB fell by a massive 17bps to 1.51%, taking its fall this week to 30bps, outperforming swaps which fell by “only” 15bps to 1.72%.
Dealers Finally *Choose* To Sell UST’s, Predictably Market Chooses to Buy All of Them

I guess we aren’t supposed to notice that the rest of the world has been buying UST’s at a furious pace. How else did the yield curve invert in the first place? Sure, the money market fund and other nonbanks like it may have preferred commercial paper or even unsecured LIBOR to a very low UST yield, but someone is buying to push every UST yield lower to begin with.

Not just someone, but a whole ton of someones. To believe in this convoluted theory, you are asked to believe that primary dealers whose entire job is to find buyers for Treasuries are disrupting repo markets and other funding mechanisms because they can’t find enough buyers for Treasuries during a time when there is otherwise so much demand for Treasuries it has upended the natural order of curves everywhere.