Risk sentiment has weakened, with a chunky fall in US equities, slightly lower US 10-year rates, and support for safe-haven currencies. The NZD and AUD have been two of the worst performing over the past 24 hours. While it might just be a case of US equities being overdue for a correction, comments on rates by Treasury Secretary Yellen also got the market’s attention.
From near-record levels, a rotation out of big tech stocks has seen a chunky 2+% fall in the Nasdaq index, and dragging the S&P500 down around 1%. Apple, Alphabet, Amazon and Facebook have all underperformed, but the rotation sees Materials, Financials, Energy and Industrials sectors all pushing higher, so it is not just a case of indiscriminate selling pressure.
Not helping the cause, in a pre-recorded interview, Treasury Secretary Yellen said that if Biden’s fiscal plans are enacted “it may be interest rates will have to rise somewhat to make sure our economy doesn’t overheat”, a contrast to her previous dovish comments that the big fiscal plans won’t cause an inflation problem. We might get further clarification of what she means when gives an interview with the WSJ at 8am NZ time. As an ex-Fed Governor, she’ll know the importance of not straying much into the realm of monetary policy.
Previous price action shows that when the market fears higher interest rates then big tech stocks get hit the hardest. The US Treasury market has been more influenced by the risk-off tone than fears of tighter monetary policy, with the 10-year rate falling as low as 1.56% and currently down 1bp at 1.59%. It was only last week that Fed Chair Powell reminded the market that rate hikes were way off and even talk of tapering asset purchases was premature.
Overnight, resident Fed hawk Kaplan repeated his comments that now was the right time to talk of tapering bond purchases. The Fed’s Daly has stuck to the script, arguing that where the FOMC has positioned policy is “perfect”, the Fed is a “long way” from achieving its jobs and price goals and that current higher inflation is transitory.
The risk-off mood has supported safe haven currencies, with the USD, CHF and JPY at the top of the leaderboard, although thrown into the mix is GBP as well, recovering from its bottom-ranked showing for the month of April. The USD BBDXY index is up 0.3% for the day.
The NZD and AUD have significantly underperformed, currently down 1.0% and 0.8% respectively, from this time yesterday, with falls overnight adding to their weakness during the NZ trading session. The NZD traded below 0.7120 overnight, now back to 0.7140, while the AUD went sub 0.7680, now back with a 0.77 handle. Fundamentally, there doesn’t seem to be anything to be worried about, with commodity prices still performing well, with most of them that make up Bloomberg’s commodity price index showing gains for the day.
The GDT dairy auction price index fell by 0.7%, close enough to our expectations of a flat result, and with the key whole milk and skim milk powder prices up 0.7% and 2.0% respectively. The overall index was dragged down by a 12.1% fall in butter and 4.5% fall in cheddar. The small fall in the index comes off a high base and still sets the scene for a windfall payout for farmers – the NZX futures price for the FY21 payment currently sits just over $7.70 and next year’s future price is just under that mark. Both have been trending higher over the past year and with global tailwinds, even higher payouts is the greater risk at this juncture.
Yesterday there was little market reaction to the RBA’s policy update, which kept policy and guidance unchanged, with the Bank still not looking to increase the cash rate “until 2024 at the earliest”. The Bank flagged that it will review its unconventional policy settings in July, including a decision on “whether to retain the April 2024 bond as the target bond for the 3-year yield target or to shift to the next maturity, the November 2024 bond”. Our colleagues at NAB do not think the RBA will extend its 3-year yield target and will likely announce an end-September taper of QE purchases.
As expected, the Bank revised higher its growth forecasts and significantly lowered its unemployment rate forecasts, reflecting the run of stronger activity data, which pushed up its inflation outlook. A full set of forecasts will be published on Friday and ahead of that, tomorrow Deputy Governor Debelle will be speaking.
Against a backdrop of a small rally in global rates, the domestic rates market showed little change across the swaps curve while most NZGB yields were up 1bp. So another day of modest underperformance, likely reflecting that prior spread contraction to US and Australian bond market had been a little overdone.
Today is a big day on the domestic calendar with the RBNZ’s Financial Stability Report and key wages and employment data. The FSR shouldn’t be a market mover, but we’ll get further insight from the RBNZ on the housing market and response to recent government policy changes. On the labour market data we see asymmetric currency risk – a strong employment report with another decent surprise fall in the unemployment rate to, say, 4.7% or lower would be NZD-positive, while a higher-than-expected unemployment rate would simply be brushed off as a reversal of the shock fall to 4.9% in Q4.
US data tonight, namely ADP employment and the ISM services index, are expected to be strong.