Risk sentiment soured on the last day of April, with US equities lower, the US 10-year rate down a touch and a broadly based increase in the USD. The NZD gave up all its gains for the week, and more, falling a chunky 1.2% on Friday night to about 0.7160.
In terms of the global reflation trade thematic that was evident through much of April, the last day of the month proved to be an outlier as risk sentiment soured. While a wealth of economic data was released on Friday there were no obvious triggers for the change in tack.
The S&P500 closed Friday down 0.7%, coming off a record high and still showing a healthy gain for April of 5.2%. As Bloomberg noted in an article, the April rally was the broadest on record. The number of days where 95% of more of S&P500 index members traded above their 200-day moving average is a rare event, occurring during only five months since 1990 and during April this happened on 18 separate days, double the previous record high of 9 days in September 2009.
US economic data releases remained on the strong side of expectations. Biden’s cash handouts to households showed up via a massive 21.1% m/m gain in personal income and delays in spending this meant that spending rose by “only” 4.2% m/m, leaving plenty of scope to see much higher spending through Q2, another likely mammoth quarter for GDP growth. The Chicago PMI gained further heights and the final reading of the University of Michigan consumer sentiment index also positively surprised. Inflation indicators surprised to the upside, with the employment cost index up 0.9% q/q, driven by higher wages and salaries, and the core PCE deflator up 0.4% m/m in March.
Euro area GDP data were a mixed bag, but even though Germany disappointed a little there were enough positive offsets so that the region contracted by a lower-than-expected 0.6% q/q. With the vaccination programme back on track in the region and restrictions likely to ease, Q2 is expected to be much better. Core CPI inflation remained well below target at 0.8% y/y.
During the Asian trading session, we saw mixed China PMI data, with the official manufacturing and non-manufacturing indices falling compared to relatively flat market expectations, but the Caixin manufacturing PMI, which is more weighted towards smaller exporters, rose by more than expected. Japan industrial production was much stronger than expected in March. So nothing here to suggest that the global economic recovery is off track.
More cautious market sentiment was evident, given that the US 10-year rate drifted lower despite the stronger US growth and inflation backdrop. The 10-year rate fell about 2bps from the NZ close, but was still up some 7bps for the week overall.
FOMC member (and non-voter this year) Kaplan broke ranks with his comrades, arguing that it was time for the Fed to start debating a tapering of bond purchases “at the earliest opportunity”, a sentiment that most in the market would probably agree with. He pointed to “excesses and imbalances in financial markets”, again anyone without a central bank employee ID badge would agree with.
In currency markets, the USD was already ascending, possibly on month-end flows, but Kaplan’s hawkish comments gave it an added boost and the BBDXY index closed the day 0.7% higher, with broadly based increases.
The NZD was one of the biggest losers, falling a chunky 1.2% from the NZ close to about 0.7160 after tracking sideways through the local trading session, giving up all its prior gain for the week and some. Consumer confidence data showed a further upward lift in its trend, now just shy of its long-term average on the ANZ measure.
The AUD fared a little better than the NZD, but not much, down 0.8% to about 0.7715, seeing NZD/AUD back below the 0.93 mark and closing the week around 0.9280. EUR and GBP were both down around 0.8-0.9%, the former keeping its head above the 1.20 mark and the latter above 1.38. USD/JPY was up about 0.4% to 109.30, while CAD managed to stay relatively flat.
The domestic rates market showed an upside bias to yields and steeper curves, with 10-year NZGB and swap rates up 4bps. There was no obvious buying or receiving pressure ahead of the May 2021 bond maturity, suggesting that investors are probably already well positioned for the increase in duration for the key indices followed. The RBNZ’s LSAP remained well offered, as earlier in the week, so it was no surprise to see the Bank keep the week-ahead LSAP at $350m, after the $50m taper last week.
Tonight sees the release of the key US ISM manufacturing index, with the regional indicators pointing to another stellar result, which should already be well priced. There are plenty more key releases in the week ahead, including the ISM services index and non-farm payrolls at the end of the week, with the consensus just shy of the 1 million mark for the April gain in employment.
An unchanged policy stance by the RBA tomorrow won’t perturb the market and there will be more interest in what Deputy Governor Debelle says in his Thursday speech and the RBA’s forecast update on Friday. In NZ, the focus will be on the wages and employment data on Wednesday, coming just after the RBNZ’s Financial Stability Report, where we’ll hear more on the Bank’s view of the housing market. Elsewhere, the Bank of England gives a policy update on Thursday night.