GDT dairy auction positively surprises, but NZD still on the softer side of the ledger. US equities consolidate near record high. US Treasury yields push lower

There has been little news overnight, and US equities are consolidating near their recent record high. US Treasury yields have drifted lower. In currency markets, EUR has outperformed, GBP has underperformed and the NZD has also been on the soft side.

After the Easter break, European equity markets caught up with the strong rally in US markets, with the Euro Stoxx 600 index rising 0.7% to a record high. US equities have shown signs of consolidation, with the S&P500 still near its record high but flat for the day. There has been little news to drive markets overnight.

As we previewed last week, the IMF upgraded its global growth forecasts from three months ago, now picking 6.0% this year (previously 5.5%) and 4.4% next year (previously 4.2%). The IMF was particularly bullish on the US, with growth driven by massive fiscal stimulus. It was noted that next year the US will be the only large economy to surpass the level of output it would have had in the absence of the pandemic. The IMF also noted that most advanced economies will merge from the pandemic with little lasting damage, thanks to the rapid rollout of vaccines and governments’ willingness to increase sharply public spending and borrowing.

Getting some airplay yesterday was an article published in the FT over the Easter break which reported that “China’s central bank has asked lenders to rein in credit supply, as the surge of lending that sustained the country’s debt-fuelled coronavirus recovery renewed concerns about asset bubbles and financial stability.” Sources suggested that after the 16% growth in new loans in January/February, the PBoC had instructed banks to keep new loans in Q1 at the same level or lower than last year.

US Treasury yields are lower across the curve, with the 10-year rate down about 3bps since the NZ close to 1.65%, after reaching as high as 1.7150 last night. It was further evidence that the recent selloff has run out of puff, with yields tracking lower after the trifecta of strong data, namely US employment and the ISM manufacturing and services indices.

Currency markets have been mixed. EUR/GBP is up 1%, with EUR outperforming, pushing up to 1.1870, while the GBP has underperformed, dragging down to 1.3825. There haven’t been any obvious fundamental causes of this move, so we’ll put it down to flows.

There has also been mixed performance by commodity currencies, with CAD and NZD falling, while AUD has pushed higher, also for no obvious reasons. The NZD traded below 0.7010 overnight but has since regained some ground to 0.7050, still down for the day. The latest GDT dairy auction showed a 0.3% rise in the price index, an upward surprise with our indicators pointing to a potential 2-3% fall. Whole milk powder prices were flat while skim milk powder rose by 0.6%. The auction suggests some consolidation in pricing following the massive run-up in through to early March, followed by the 3.8% fall in the mid-March auction. The annual price gain is in the order of 38%.

AUD is slightly higher for the day at 0.7665 and NZD/AUD traded as low as 0.9195 overnight and is currently not much higher. The RBA announcement came and went with no surprise, the Bank repeating its policy guidance – the Board does not expect the conditions for a rate hike to be met until 2024 at the earliest. Descriptions of the domestic economy were more positive, noting the recovery has been “stronger than had been expected” with the unemployment rate falling to 5.8% and the level of jobs returning to pre-pandemic levels. Despite this, the RBA still forecasts wage and price pressures to remain subdued.

The NZ rates market had a quiet session with little flow and lower rates reflecting global forces, with longer term yields down in the order of 3-4bps across the NZGB and swap curves. The opening up of quarantine-free trans-Tasman from 19 April had been well anticipated and will provide a welcome boost to confidence and economic activity. The day ahead looks like another quiet one.