US economic data since last Thursday has been very strong, including payrolls and both ISM surveys. Equities have rocketed higher while the USD has experienced a broad-based decline, with the NZD pushing back to 0.7060. US yields have been volatile but with little net change since Thursday. Some caution needs to be applied to the market moves as liquidity has been thinner than usual over Easter. Ahead today, the NZ government makes its announcement on the Trans-Tasman ‘bubble’ at 4pm.
US economic data over Easter has been universally positive and the key driver of market sentiment over the past few days. The US nonfarm payrolls report was a blockbuster, with the US economy recording 916k new jobs in March (consensus: +660k), to go alongside an upwardly revised 468k gain in February. The vast majority of the jobs created were in the services sector (e.g. leisure and hospitality accounted for 260k jobs alone), as more businesses reopened and rehired employees. The unemployment rate dropped 0.2%, as expected, to 6% while the broader underemployment measure fell 0.4% to 10.7%. The number of employed Americans remains some 8.4 million below what it was pre-Covid. But with the economy expected to continue reopening over the coming months, economists expect jobs growth to accelerate and the unemployment rate to fall sharply. In other data, the US ISM Manufacturing survey rose to 64.7, its highest level since the mid-1980s, with the key New Orders component, at 68, at its highest level in more than 15 years. And overnight, the ISM Services index jumped from 55.3 to 63.7 (consensus: 59), its highest level since the survey’s inception in 1997.
Equity markets have powered ahead, with the better-than-expected economic data reinforcing the market’s view that the global economy, and hence corporate earnings, will grow strongly this year. The S&P500 is up around 1.5% overnight and some 2.7% since Thursday morning NZ time. The S&P500 has broken above 4,000 for the first time and is trading at a new record high. The NASDAQ has also made strong gains over Easter and now trades around 3% from its all-time high, set in February. Company specific news has helped the rally in tech stocks, with the US Supreme Court ruling in favour of Google’s parent Alphabet in a multibillion-dollar copyright infringement case and Tesla reporting better than expected car delivery and production numbers in Q1. European equity markets have been closed over Easter.
The other notable market trend over Easter has been USD weakness. The Bloomberg BBDXY index is around 0.6% lower than at the time of the NZ market close on Thursday and its decline has been broad based. Stronger-than-expected US economic data hasn’t provided much support to the USD, besides a brief rally after the payrolls report. The risk-on market backdrop and some stability in US Treasury yields (see below) are the likely reasons for the turnaround in the USD. Market positioning is also more balanced, with speculative investors having substantially reduced popular USD short positions over the past month.
The EUR is back above 1.18 this morning, having tested 1.17 late last week, while USD/JPY is trading just above 110. The GBP is back to 1.39, helped by PM Boris Johnson’s confirmation that pubs, shops, hairdressers and gyms would reopen from next Monday. Meanwhile, the NZD is almost a cent higher than the local market close on Thursday and trades this morning around 0.7060. There has been less movement on the NZD crosses, indicative of the USD-centric nature of the currency moves over Easter. The NZD/AUD cross is trading around 0.9220 this morning.
Despite the stronger US data, there has been little net change in US Treasury yields over the past few trading sessions. The US 10-year yield is still trading just above 1.70% this morning. The yield curve initially flattened after payrolls, with the market bringing forward the timing of Fed rate hikes, but this move has mostly reversed overnight. The market prices the first 25bp rate hike from the Fed towards the end of 2022. As mentioned earlier, trading activity has been lighter than usual over Easter, so it may take a few days for the market to fully reflect these recent data developments.
There wasn’t much movement in domestic rates last Thursday ahead of the long weekend. Of note, the RBNZ removed inflation-indexed bonds from its QE buyback schedule this week (it had purchased only $10m last week). 10-year market-implied inflation expectations are almost back to 2%, a far cry from the ~0.5% levels that prevailed before the RBNZ added inflation-indexed bonds to its QE programme last May. The RBNZ is now buying just nominal government bonds under its QE programme, having now removed both inflation-indexed and local government bonds from its buybacks.
In vaccine news, the UK regulator revealed that seven Britons who have received the AstraZeneca vaccine have died from blood clots. The regulator insists the vaccine is safe, with the just 30 reported instances of blood clotting in the UK amongst the more than 18 million who have received a dose so far, but several countries have now suspended its use for younger people. In more encouraging news, Pfizer and BioNTech reported tentative evidence that their vaccine was still effective against the South African variant (B.1.351). In a trial of 800 participants in South Africa, none of those who took the vaccine contracted Covid, compared to nine in the placebo group (six of whom were infected with the South African variant). The small-scale nature of the trial means the results should be treated with some caution, but it is encouraging news nonetheless.
At 4pm today, the NZ government is set to confirm the start date for, and operational details of, the long-awaited trans-Tasman travel bubble. The RBA meeting also takes place today. The RBA is not expected to make any policy changes although it will need to acknowledge the sharp fall in the unemployment rate to 5.8%. Markets will be closely watching for any discussion from the RBA around its Yield Curve Control setup.
Later this week, Fed Chair Powell will speak on an IMF panel on Thursday night while the FOMC minutes are released on Thursday morning. Locally, the preliminary release of the April ANZ business survey comes out on Thursday.