Bond yields and USD tick up on Friday, but both still lower on the week. RBNZ Monetary Policy Report on Wednesday - not expecting any major changes from the February MPS.

Friday capped off a positive week for equity markets, with both the S&P500 and Dow making fresh record highs. Bond yields and the USD ticked up on Friday, although both were still lower on the week. The RBNZ Monetary Policy Report takes place this week but we are not expecting any major surprises.

There wasn’t any major news to drive markets on Friday, but sentiment remains broadly upbeat. Equity markets continue to push higher, with the S&P500 increasing 0.8% and the NASDAQ 0.5% on Friday, bringing their respective gains on the week to 2.7% and 3.1%. The impressive vaccine rollout in the US, which has solidified expectations that the US economy will rapidly rebound this year, a pause in the bond market sell-off, and falling equity market volatility have all helped boost equities. The VIX index of implied equity market volatility fell below 17 on Friday, its lowest level since before the crisis last March.

Optimism around the US corporate earnings season, which kicks off properly this week with the major US banks reporting, may also be buoying market sentiment. For the S&P500, the consensus is for earnings growth of 25% in Q1 from a year ago, according to Refinitiv, and 26.5% for 2021 as a whole (compared to -12.6% last year). The Financials sector is expected to be one of the top performers in Q1 (+76% y/y) with banks expected to continue writing back loan loss provisions they made last year. The Consumer Discretionary sector, which was hard hit by the lockdowns last year, is also expected to post a huge increase in Q1 earnings on a year ago (+98%).

Markets brushed off news that Europe’s drug regulator had opened an investigation into Johnson & Johnson’s vaccine, after four serious cases of blood clotting. Multiple countries have already restricted AstraZeneca’s vaccine use amongst younger people after rare instances of blood clotting and the concern would be that a similar fate could occur with the J&J vaccine. More encouragingly, the FT reports over the weekend that Europe’s stuttering vaccine rollout is finally making some progress, with supplies increasing rapidly and vaccination accelerating.

Bond yields rebounded on Friday, with the US 10-year Treasury yield increasing 4bps, to 1.66%. The 10-year yield had hit a two-week low earlier on Friday morning. The rebound in US yields comes ahead of another big week of supply in the US, with 3 and 10-year bond auctions tonight and 30-year bonds being issued tomorrow night. In Europe, 10-year government bond yields were 3-7bps higher on Friday night. NZ swap rates, which fell slightly on Friday, are likely to open higher this morning, reflecting these global moves post the local market close.

In economic data, US annual headline PPI inflation was over 4% higher than a year ago while core PPI inflation (ex food and energy) breached 3%, with both at their highest levels in 10 years. The surge in PPI partly reflects base effects but also higher commodity prices and supply-chain issues. US headline CPI is also expected to increase sharply when the data is released this week (consensus: +2.5% y/y) although core CPI is expected to remain subdued for now, at just 1.5%. Fed Vice Chair Clarida reiterated comments made by Powell the night before, telling Bloomberg that the Fed expects this bump up in inflation to be transitory and hence one which won’t necessarily affect its monetary policy settings. Clarida acknowledged there were risks on both sides of the inflation outlook and, if underlying inflation pressures were to mount, it had “the tools to address that”.

Like US Treasury yields, the USD managed a small bounce to end the week. Both the DXY and BBDXY indices were up 0.1%, paring their losses on the week to 0.9% and 0.5% respectively. The fall in the USD last week can be explained by the pullback in Treasury yields and further improvement in risk appetite.

The CAD was the top performing currency on Friday (+0.25%) after another blockbuster Canadian employment report. Canada employment growth was almost three times expectations in March, at +303k, while the unemployment rate fell from 8.2% to 7.5%. Despite new Covid-related restrictions coming into force in Ontario on Friday, there has been speculation the Bank of Canada could signal a tapering of its bond buying as soon as this month’s meeting.

The EUR fell back slightly on Friday night but still gained more than 1% on the week, closing at 1.19. There were similarly modest falls in the AUD (-0.4% to 0.7620) and the NZD (-0.2% to just below 0.7040) on Friday. The NZD and AUD were both little changed last week despite broad-based USD weakness.

In the week ahead, we expect the RBNZ to maintain its monetary policy settings (including its LSAP bond buying limit at $100b) and stick to its cautious rhetoric at Wednesday’s Monetary Policy Review. Since the February MPS, Q4 GDP undershot the RBNZ’s forecast by 1% and the government’s March 23rd housing policy announcement is expected to dampen the housing market. On the other side of the ledger, inflationary pressures are picking up as well as expectations for global growth. On net, we think the balance probably hasn’t moved too much and the RBNZ will remain in ‘watch, worry and wait’ mode.

In Australia, our NAB colleagues look for an above-consensus 55k increase in jobs in March (consensus +35k) and for the unemployment rate to decline 0.2%, to 5.6%. The March employment numbers predate the end of the Australian government’s job support scheme. Chinese activity indicators are released on Friday along with GDP (+1.4% q/q expected for Q1). In the US, as already mentioned, CPI will be in focus this week along with retail sales, which are expected to jump over 5% on the month after a fresh round of government stimulus cheques. Fed Chair Powell’s interview with 60 Minutes, a few snippets of which have already been released, is broadcast today.