Markets have traded with a risk-off tone overnight. Equities and bond yields have fallen while the USD, after six consecutive down days, has rebounded. The NZD broke above 0.72 yesterday, for the first time in a month, but it has since fallen back to 0.7170, modestly lower than where it was this time yesterday. NZ CPI is in focus today and the Bank of Canada meeting tonight. The BoC is expected to announce it will taper its bond buying.
Once again, there hasn’t been terribly much news to speak of over the past 24 hours. Equity markets are down for the second day in a row, although the moves have been reasonably modest in the context of the run-up over the past month. The S&P500 is currently down 1%, adding to yesterday’s 0.5% decline. The NASDAQ is down about 1.3% and the Eurostoxx 600 index was off almost 2%, albeit from what was a record high. The move in equities looks like a healthy pullback after a strong run rather than a major change in the market’s view of the growth and earnings outlook.
US corporate earnings results continue to come in stronger than expected, albeit without much impact on the broader equity indices. J&J, IBM and Proctor and Gamble were among those to beat analyst expectations over the past 24 hours. Of the 61 S&P500 companies that have reported so far, 90% have beaten analyst expectations by, on average, 22%, which is well above historical norms. Of interest for the inflation outlook, some companies have been signalling their intention to raise prices, including Coca Cola earlier this week and P&G overnight, as they seek to pass on higher commodity prices and other costs to consumers. Netflix reports after the bell this morning, the first major tech name to release earnings.
On Covid-19, the European medical regulator released its assessment of the Johnson & Johnson vaccine overnight, outlining a “possible link” to rare cases of blood clots but saying the benefits outweighed the risks. In response, Italy announced it would start using the J&J vaccine although only on those aged 60 or over. J&J will now resume shipments to the region, although the EU has already taken steps to boost its supplies of Pfizer’s vaccine, which hasn’t had the same negative media coverage around adverse side effects.
Bond yields have moved lower overnight, reflecting the risk-off mood in markets. The US 10-year yield, which was trading at 1.63% in the London morning, is now back at 1.56%, near its recent lows. Bond markets are going through a consolidation phase after a sharp rise in yields earlier in the year. In New Zealand, rates were higher yesterday, with the 10-year swap rate rising 4bps to 1.83%, but the overnight fall in US yields should see these moves reverse this morning (at least until the CPI release).
The more cautious risk backdrop has led to a rebound in the USD overnight. The USD is 0.2-0.3% stronger, in index terms, after six consecutive down days. The JPY has unsurprisingly outperformed amidst the risk-off backdrop, with USD/JPY holding just above the 108 level. After a push higher in the London morning, the EUR is now marginally lower on the day as it consolidates above 1.20.
Commodity currencies have underperformed, with the CAD and AUD down about 0.6% and the NOK the weakest of the G10 currencies, down 0.9%. The AUD had earlier traded above 0.78 for the first time in a month, but it is now down more than a cent from those intraday highs, to around 0.7715. The NZD is modestly lower over the past 24 hours (-0.25%), although it has outperformed the rest of the commodity currency bloc. Like the AUD, the NZD had a run-up above 0.72 in the London morning, but it has since drifted back to around 0.7170 as equity markets have traded lower. Last night’s dairy auction showed little change in both the overall price index and whole milk powder prices.
Yesterday’s RBA minutes didn’t provide much new information. The RBA repeated that it will decide later this year on whether to extend the target bond for its three-year yield target from the April 2024 maturity to the November 2024 maturity. The November 2024 bond yield jumped 4bps after the release of the minutes, to 0.32%, suggesting the market was looking for more discussion around the possibility of such a change (our NAB colleagues do not expect the three-year target bond to be extended to the November 2024). The next RBA meeting on the 4th May will reveal more about its assessment of the outlook in light of the much stronger than expected recovery in the labour market.
The NZ CPI release is the key focus for the domestic market today. We are in-line with the median market estimate for a 0.8% quarterly increase in headline CPI (RBNZ: +1%), which should keep the annual rate of headline inflation steady at 1.4%. While headline inflation will remain below the RBNZ’s 2% midpoint, it’s likely to head towards the top of the target range in the coming quarters. Given the RBNZ’s pledge to look through temporary influences on inflation, we expect the market to focus as much, if not more, on the core measures, which were clustered around the 2% market in Q4. OCR expectations have been very steady over the past few weeks, with around a 50% chance of a 25bp hike priced-in by mid-2022 and a full hike by the end of the year.
The Bank of Canada meets tonight and is expected to announce a tapering in its QE purchase pace, from $4b/week to $3/week. The expectations for tapering come against a backdrop of strong Canadian macro data (not least the almost 2% fall in the unemployment rate over the past two months) and some concerns that, if the BoC continued with its current pace of purchases, it could start to affect bond market liquidity going forward. The BoC owns around 35% of the domestic bond market. For context, the RBNZ owns around 37% of the NZ government bond market (42% of nominal bonds) and has been steadily reducing its QE purchase pace over the past six months.