Equity markets continue to grind higher on economic optimism, with the S&P500 and Dow Jones ending the week at fresh all-time highs. US rates stabilised on Friday after their sharp falls the previous night. The NZD and AUD fell back on Friday despite continued USD weakness.
Market sentiment remains positive, underpinned by expectations for a rapid economic expansion this year and continued accommodative monetary policy. Last week, the US crossed the 200 million threshold of vaccine doses administered, with just under 40% of the population having had at least one shot. Even in Europe, where the vaccine rollout has been beset by supply problems and concerns around rare side-effects from the AstraZeneca vaccine, vaccination is now making some progress. Almost 28 million doses were administered in the EU over the past fortnight, with almost 20% of the population now having received at least one dose.
Echoing the market’s upbeat sentiment, new Fed governor Christopher Waller told CNBC on Friday that he thought the US economy was “ready to rip”, with a clear runway for Covid-related restrictions being lifted in the coming months. But, reinforcing the idea that central banks will be slow to move, despite what will be a sharp bounce back in economic activity, Waller noted that “there’s no reason to be pulling the plug on our support till we’re really through this.” Another factor supporting the Fed’s dovish leanings is its greater focus on broader measures of labour market performance, with Waller observing that unemployment rates were still relatively high for minority groups.
Against this backdrop, equity markets continue to push higher. The S&P500 increased 0.4% on Friday, bringing its gain on the week to 1.4% and leaving it at a fresh all-time high. The NASDAQ edged up 0.1% while the Eurostoxx 600 index rose 0.9% to a new record high. Corporate earnings season gets into full swing this week with around 80 S&P500 companies reporting, including Netflix, IBM and American Airlines. Morgan Stanley was the last of the major US banks to report on Friday and, like the others, beat expectations, even after revealing an almost $1b loss related to the collapsed family office, Archegos.
When we sent this report on Friday morning, the US 10-year yield had plummeted 10bps to a one-month low of 1.53%. But US Treasury yields bounced back into the US market close on Friday morning before tracking sideways on Friday night. The US 10-year ended the week at 1.58%, 8bps lower on the week. European government bond yields also rebounded on Friday, with the German 10-year yield rising 3bps, to -0.26%, near its highest level in six weeks.
The decline in US interest rate differentials goes some way to explaining the weakness in the USD last week. The BBDXY index fell another 0.1% on Friday, bringing its loss on the week to 0.7%, its biggest weekly fall since last December. Further improvement in risk appetite, as seen in the continued push higher in equity markets, has been another headwind for the USD. The USD tends to weaken during periods when risk appetite is buoyant.
The EUR increased slightly on Friday (+0.1%), with the market turning a bit more optimistic around the European vaccination drive. It ended the week just below the 1.20 mark. Other currency moves were also modest, with the GBP topping the currency leader board with a gain of 0.3%.
Surprisingly, given the risk-on backdrop, the NZD and AUD were the weakest of the G10 currencies on Friday. The NZD fell 0.4% on Friday, ending the week at around 0.7145, while the AUD eased back 0.2%. Still, it was a good week for both currencies, with the NZD up 1.55% and the AUD 1.45%, supported by broad-based USD weakness, rising risk appetite, and strengthening commodity prices.
There wasn’t much market reaction to economic data released on Friday. Chinese GDP growth for Q1 came in weaker than consensus, at 0.6%, but revisions to prior quarters meant the annual rate of growth, at 18.3%, was close to market expectations. The extremely high annual growth rate is flattered by the comparison to the Covid-related slump a year ago. The monthly Chinese activity indicators were a mixed bag, with retail sales stronger than expected in March but industrial production and fixed asset investment weaker than expected. In the US,
the University of Michigan consumer confidence index increased to 86.5, although this undershot the consensus which was looking for an even larger rebound.
In NZ, the Manufacturing PMI increased to 63.6, the survey’s highest reading since it started in 2002. While the index can be volatile from month to month, it is consistent with the strength seen in similar manufacturing surveys overseas. The PSI is released today and will provide a fresh read on the services sector. In contrast to the strength in manufacturing, the PSI has been stuck below the 50 mark since November, indicating, at face value, contraction in the services sector.
The NZ curve moved lower and flatter on Friday, reflecting the big fall in US Treasury yields the previous night. Both the 10-year swap rate and government bond yield fell around 5bps on the session against little movement in short-term rates. NZ rates, like those offshore, look to be going through a period of consolidation after what had been a big move higher earlier this year.
NZ CPI, which is released on Wednesday, is the focus domestically in the week ahead. We’re looking for a quarterly increase of 0.8% in Q1 (RBNZ: +1%), which should keep the annual headline inflation rate steady at 1.4%. The market will also be watching the measures of core inflation, which were clustered around the RBNZ’s 2% target in Q4. Headline CPI inflation is likely to rise towards the top of the RBNZ’s 1-3% target range in the coming quarters, although the RBNZ has already said it will look this, if driven by temporary factors.
Overseas, the European PMIs on Friday night are the highlight in an otherwise quiet week for economic data. The ECB is expected to keep its policy settings unchanged at its meeting on Thursday night. Finally, the US is set to resume use of J&J’s Covid-19 vaccine by Friday according to Biden’s top medical advisor, Anthony Fauci, although potentially with some age or sex restrictions.