Risk sentiment higher from Friday on positive economic data. US equities track close to record high but bond markets flat. NZD and AUD well supported, up to 0.7240 and above 0.78 respectively. Big week ahead for economic data and other events

Since locals left the office Friday for the long weekend, risk sentiment has improved, supported by strong PMI data. The S&P500 is tracking close to its record high, while the NZD and AUD have been the top major currency performers. Bond markets have tracked sideways, with the US 10-year rate and Australian 10-year bond future little changed.

Economic data released Friday night was mostly stronger than expected, consistent with the view that activity is roaring back on both sides of the Atlantic, as some COVID19-related restrictions ease and economies gradually reopen for business. The Markit PMIs surprised to the upside in the US, UK and Eurozone.

The US services PMI lifted to 63.1, the highest level in at least 11 years. The manufacturing PMI was also strong at 60.6. New home sales jumped over 20%, with a sharp rebound following the severe winter weather in February. Looking forward, a slowdown in mortgage applications since January suggest some easing will occur against the backdrop of higher mortgage rates. Euro area PMIs also beat expectations, with services at 50.3 despite the recent tightening in restrictions for some countries. Manufacturing was also strong at 63.3.

In the UK, alongside strong PMI data, retail sales for March blasted expectations, with core sales up nearly 5%, illustrative of the sharp rebound in activity as restrictions gradually lift.

Data released overnight has been a bit more middling. Germany’s IFO survey underwhelmed, with the expectations component defying expectations by deteriorating even as the current conditions component improved a little. Germany’s government raised its growth outlook for this year from a conservative 3% to 3.5%, bringing it more in line with other forecasters. US durable goods orders were softer than expected, dragged down by cancellation of Boeing aircraft orders, even as the company reported the strongest month for new orders since 2018. Core durable goods orders were in line at 1.6% m/m.

The biggest piece of weekend news was US Democratic Senator Manchin again pushing back on Biden’s infrastructure bill as well as re-stating he doesn’t want to use budget reconciliation. Manchin told CNN that he wants a “more targeted ” version of the proposed $2.2 infrastructure package and supports the Republican proposal for a cut-down $600bn counteroffer, while also previously stating he doesn’t support he extent of the proposed increase in the corporate tax rate. Note Manchin’s vote is critical if Republicans oppose bills in the Senate. Furthermore, it appears an infrastructure bill is still some way off alongside further spending plans this side of the mid-term elections in 2022. 

COVID19 news has been focused on the disaster in India, with a virulent strain causing sky-rocketing new case numbers that are overwhelming hospitals and with oxygen in short supply. While that is a tragedy, market sentiment hasn’t been impacted as new case numbers are falling across the US, are flat to lower across Western Europe, and are falling in other notable hotspots such as Eastern Europe, Turkey and Brazil.

Solid economic data and a strong earnings season have helped support US equities, with the S&P500 tracking close to a record high, with a gain of 0.3% overnight adding to Friday’s 1.1% gain. US Treasury yields have tracked sideways since Friday’s NZ close, trading to a high of just under 1.60% overnight, from a low of 1.53% Friday night and currently 1.57%, to be little changed. Australian 10-year bond futures are little changed from the 98.30 level at Friday’s NZ close.

Currency markets reflect the risk-on mood, with the NZD and AUD the best performing majors since we left on Friday, and up 0.8-0.9% overall. NZD has trended higher to 0.7240 and we’d put resistance at the level seen earlier in the year of 0.7315. The AUD is back up through 0.78, while NZD/AUD is tracking sideways around 0.9280.

The NZD is higher on all the other crosses, with the biggest gain since the Friday’s local close of 1% against JPY, taking NZD/JPY up to 78.3. Gains against EUR and GBP have been more modest at 0.3% and 0.6% respectively.

Domestic rates were up in the order of 3-4bps on Friday for longer maturities and we wouldn’t expect much change on the open with neutral global forces since then. On Friday the RBNZ announced it would reduce its bond buying pace this week, from $400m to $350m.  The decision to reduce the purchase pace comes after the Bank struggled to source long-term bonds in two of its buybacks last week, likely related to the upcoming index extension event ahead of the maturity of the May 2021 NZGB.  We think the RBNZ is likely to keep gradually reducing the QE purchase pace this year.

In the day ahead, we wouldn’t expect to see anything new from the BoJ policy meeting, following the tweaks at the last meeting. In data tonight, US consumer confidence is expected to lift further.

Over the rest of the week the economic calendar is full. Highlights are Australian Q1 CPI, US Q1 GDP and PCE deflators, Euro area Q1 GDP and China PMIs. As well as all that, the US earnings season is in full swing, President Biden is addressing a joint session of Congress to detail his “American Family Plan”, while the FOMC provides a policy update.