The market was unperturbed by news of a pause in the use of the J&J vaccine and stronger than expected US inflation data, with the S&P500 pushing up to a fresh record high. US Treasury yields and the USD actually fell after the inflation report, seeing the NZD and AUD make overnight gains in the order of 0.6%.
There was a risk-off then risk-on move overnight following two key pieces of news, firstly the negative news on the J&J vaccine and then the “positive” news on US inflation.
The US FDA and CDC called for an immediate pause in the use of Johnson and Johnson’s single-dose COVID19 vaccine after six women aged 18-48 who received it developed a rare and severe form of blood clotting and one died. The vaccine uses the same technology as the AstraZeneca vaccine which has also evidently seen a similar problem. There is an abundance of other vaccines in the US so this hiccup will have little impact there, but it will affect the vaccination efforts of other countries. The drug will be reviewed, said to take only a few days, while J&J will also delay the rollout of the drug to Europe.
After a weak run over the past few months, US core CPI inflation was 0.3% m/m in March, 0.1 percentage points stronger than expected, taking the annual increase to 1.6%. The headline rate showed a similar forecast miss and rose to 2.6%. A pick-up in inflation has been much anticipated and this is seen as only the beginning.
After the J&J vaccine news, market sentiment soured a little and we saw movements consistent with a risk-off move. However, that turned out to be temporary, with the market seemingly cheering the positive US inflation surprise. The market knows that the Fed is going to be looking through any lift in inflation, which it sees as transitory. And market reaction seemed to reflect a view that much higher inflation has already been priced-in to an extent.
So post the inflation surprise, we have the S&P500 printing a fresh record high, up some 0.3%, but with an even larger 0.9% gain for the Nasdaq index. The US 10-year Treasury yield has headed lower after the inflation report, now down to 1.62%, some 7bps lower since the NZ close. The move was supported after the $24b auction of 30-year Treasuries went off strongly, with the awarded yield of 2.32% just over 1bp lower than the when-issued yield and higher bid-cover than the recent run-rate.
Lower US Treasury yields alongside higher risk appetite have seen a broadly based decline in the USD, with the BBDXY index down 0.4% since the inflation report. The NZD and AUD head the leaderboard, with gains of 0.6% overnight to 0.7050 and 0.7640 respectively. GBP has gained the least of the majors against the USD, up slightly to 1.3750. The Bank of England’s biggest inflation hawk Chief Economist Andy Haldane will step down from the MPC in June.
In other economic news, Chinese export and import data both showed strong rises of over 30% y/y in March, off a weak base, but with a mix of stronger than expected import growth and relatively softer export growth. Still, the data were consistent with the Chinese domestic and global recovery theme that is boosting trade across the world.
NAB’s monthly business survey showed a broadly-based lift in business conditions to a record high in March, alongside record high forward orders. Strength in Australian business sentiment stands in contrast to the middling level of confidence for NZ businesses, but this seems to be well in the price for the cross, with NZD/AUD slightly higher around 0.9230.
The NZIER’s quarterly survey of business opinion reinforced the message of a supply-constrained economy with rising inflationary pressure. In terms of factor constraints relative to usual, sales and financing conditions weren’t an issue but materials, labour and “other” factors were key concerns. Firms recognised higher cost pressures and more firms indicated that they would be raising selling prices. These messages have been clear in anecdotal information and the timelier ANZ monthly business survey.
The data likely won’t sway the RBNZ as it is adopting the global central bank playbook of waiting until actual printed inflation rises and clearer evidence that such conditions will be sustained, before contemplating raising interest rates, much later than textbooks advise how to run monetary policy. The Monetary Policy Review this afternoon is widely anticipated to convey the same policy message as in February – to remain cautious about the outlook as the pandemic continues and to offer more stimulus if required to achieve its objectives.
The domestic rates market showed a 1-2bps lift in rates across the curve, outperforming the Australian bond market as higher yields there were impacted by greater supply, with a long-end syndication. The lower yield backdrop overnight should see lower NZGB rates on the open.
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