S&P500 flat around record high. US 10-year rate trends higher, up 5bps, with higher supply and commodity prices in the mix. NZD and AUD head lower despite positive commodity price backdrop. FOMC policy update in less than 24 hours

Ahead of the FOMC meeting in less than 24 hours the S&P500 is trading flat while the US 10-year rate has trended higher, up 5bps for the day. This move has driven weakness in JPY and commodity currencies have underperformed despite further gains in commodity prices.  The NZD has held the 0.72 handle.

After yesterday’s fresh record high, the S&P500 has spent most of the overnight session in negative territory but is currently flat as we go to print. Earnings reports continue to roll in. About 30% of companies in the S&P500 have reported so far this season with nearly 88% beating analyst expectations (higher than usual), but just 58% of reporting companies have seen a higher stock price post-result. Microsoft and Google parent Alphabet will report after the market closes this morning.

US consumer confidence blasted ahead of expectations, rising to a post-pandemic high of 121.7, led by the current conditions component, supported by the reopening of the economy and Biden’s cash handouts. The survey included a sharp improvement in assessment of labour market conditions, with the “jobs plentiful” indicator showing the biggest monthly jump in the series’ forty-year history.

With little chance of getting an economy-wide increase in the minimum wage to $15 per hour through Congress, President Biden is set to sign an executive order forcing federal contractors to pay the rate (currently $10.95 following an executive order from President Obama) from March 2022.

Yesterday, the Bank of Japan left its policy settings unchanged and downgraded its inflation outlook such that the projections now show that Governor Kuroda will fail to reach the goal of 2% inflation after more than a decade of aggressive monetary stimulus. Arguably, this highlights the futility of trying to achieve 2% inflation – given the unintended consequences striving for that target has caused – and could well apply to other central banks, in today’s world with strong structural disinflationary forces. Put your hand up if you’d rather see your purchasing power eroded by 2% per year rather than 1% per year. Only central bank officials think that way.

Iron ore prices hit a record high $193.85 per tonne, beating the previous spike seen in 2011. Copper prices also continue to rise and are just shy of the 2011 peak. Strong demand for both commodities is said to be underpinned by strong physical demand from China. On a day where it seems most commodity prices are tracking higher, oil prices are also up but show modest gains of 1-1½%.

Higher commodity prices look to be playing some role in driving up US Treasury yields overnight, with the 10-year rate trending higher, up 5bps for the day to 1.62%, driven by the break-even inflation component. Absorbing higher supply might also have been a factor. The Treasury’s $62b 7-year bond auction went off smoothly with a higher bid-cover ratio compared to the previous six auctions and the 1.306% rate very close to the prevailing market rate ahead of the issue.

Currency markets show only modest movements. Relative to this time yesterday, changes have been infinitesimal for GBP, EUR, CHF and CAD. JPY is a notable underperformer. While the BoJ update had little impact as usual, higher US Treasury yields have likely been the main cause of a 0.6% rise in USD/JPY to 108.70.

Despite the higher commodity prices backdrop, the NZD and AUD have surprisingly underperformed, edging lower overnight to add to the small loss seen during local trading hours. The NZD has kept its head above the 0.72 mark, but only just, while the AUD is down 0.5% for the day to 0.7765. The NZD is down on all the key crosses, apart from the AUD.

The domestic rates market showed little movement yesterday, with a rise of about 1bp for most maturities across the bond and swap curves, in line with what we saw from tepid global forces since Friday’s close before the long weekend. A big World Bank 7-year Kauri issue (looking to print a minimum $700m) and an ASB 5-year bond issue (minimum $100m) grabbed the market’s attention.

In the day ahead, Australian CPI figures will be closely watched. Annual rates of headline and core inflation are expected to remain subdued, but quarterly increases expected of 0.9% and 0.5% respectively speak to a lift in inflationary pressure in Q1, albeit unlikely to move the RBA to change its tune. The FOMC’s latest policy update due tomorrow morning should pass without any fireworks, with the Fed unlikely to budge from its policy message even in the face of a strong rebound in growth and inflation.