Despite further strong economic data, global rates fell sharply overnight. The US 10-year yield is 10bps lower and at its lowest level in a month. Equities continue to power ahead, supported by the lower rates, strong data and robust corporate earnings results. FX moves have been modest, but with a bias towards USD weakness and NZD and AUD strength.
Economic data continues to roll in much stronger than expected, reinforcing the market’s view that global growth will be exceptionally strong this year. US retail sales increased almost 10% in March, 4% stronger than the market consensus, following the US government’s disbursement of $1,400 stimulus cheques. The Philadelphia Fed’s business survey hit its highest level since the 1970s while the Empire manufacturing survey, covering the New York region, was also stronger than expected. The regional Fed surveys, like the national ISM, are consistent with a super-strong manufacturing sector. Jobless claims were also much lower than expected, albeit likely affected by seasonal adjustment issues over the Easter period.
One might ordinarily have expected rate to increase on such upside data surprises. Instead, they have tumbled. The US 10-year yield is some 10bps lower on the day, at 1.53%, its lowest level in a month. Rates in other countries have taken their lead from the US, with 10-year government bond yields in Europe falling 3-7bps and the Australian 10-year bond future implying a 7bp fall in yield since the NZ market close.
Market positioning is almost certainly a large part of the reason for the fall in rates, with short positioning in bonds a widely held consensus view. The pullback in rates also needs to be seen in the context of the rapid increase since the start of the year; a period of consolidation was always likely at some point. But the broader reflation narrative hasn’t changed, and we still think that rates will ultimately head higher again after this positioning washout is over.
Equities have benefited from this goldilocks combination of stronger economic data and falling bond yields. The S&P500 has increased 1% overnight to a fresh record high while tech stocks have outperformed, with the NASDAQ up 1.25%. Corporate earnings have been another supportive factor for equities, with Bank of America and Citigroup both reporting stronger than expected earnings results overnight, although both their share prices slipped. Like JPM the night before, the two banks recorded very strong trading and investment banking revenue while loan loss provisions were reduced.
Currency moves have been a sideshow to those in bonds and equities, but the directional changes have been in-line with what one would expect. The USD is weaker, albeit only modestly, amidst less yield support and rising risk appetite. The BBDXY index is off 0.1% and is trading at a one-month low. The NZD and AUD have outperformed against a backdrop of USD weakness and rising equity markets. The NZD has topped the currency leader board over the past 24 hours, up 0.5% to 0.7170, while the AUD is the next best-performing currency (+0.4% to 0.7755). The EUR has shown little movement and continues to hover just below 1.20.
It’s not just the US where the market has brushed off strong economic data. Yesterday’s blockbuster employment report in Australia generated only a short-term blip higher in Australian rates and the AUD. Australia recorded 71k new jobs in March, double the market consensus, with the unemployment rate falling 0.2%, to 5.6%. For context, the RBA’s most recent forecasts didn’t have the unemployment rate reaching 5.5% until the end of 2022, although these forecasts will be refreshed on May 7th in the Statement of Monetary Policy. The survey predated the end of the Australian job support scheme, JobKeeper, which ended in late March, although our NAB colleagues don’t think this will prevent further improvement in the labour market going forward. Despite the super-strong employment report, the NZD/AUD cross has drifted higher over the past 24 hours to trade this morning around 0.9250.
In the domestic rates market, swap rates increased 1-3bps yesterday, largely tracking moves in Australia. In contrast, government bond yields fell, after a very strong bond tender. The 10-year yield closed 2bps lower on the session, at 1.68%, in contrast to the 3bp increase in the 10-year swap rate. The outperformance of government bonds comes ahead of the May-2021 government bond maturity which will trigger sizeable duration extensions for the domestic bond indices. The index extensions will likely lead to bond buying from those fund managers who are benchmarked to these indices. The NZ curve will open lower and flatter this morning following the overnight moves in global rates.
In domestic data, yesterday’s REINZ data showed house prices jumped 2.7% in March, taking the annual increase to an eyewatering 24%. The data largely predate the government’s recent policy measures on housing (which were announced on the 23rd), so next month’s figures will be closely watched. The accompanying commentary hinted at some reservation amongst property investors, although nothing too dramatic as things stand.
There is plenty on the agenda in the session ahead. The monthly batch of Chinese activity data is released as well as Q1 GDP, with the market consensus looking for 1.4% quarterly growth. The University of Michigan consumer confidence index is released tonight and there will be some focus on the 5-10 year inflation expectations measure, which reached a six year high last month. Locally, the Manufacturing PMI is released this morning.