US equities and rates markets have tracked broadly sideways overnight, as the market moves into a holding pattern ahead of the nonfarm payrolls report tomorrow night. Commodity prices remain firm, driving gains in commodity currencies and inflation expectations. The NZD has outperformed after a strong HLFS labour market report yesterday.
The S&P500 and NASDAQ are up around 0.2-0.4% overnight, recovering some of their falls from Tuesday night, while the Eurostoxx 600 index increased 1.8%. The gains have been partially attributed to US Treasury Secretary Janet Yellen backtracking on her comments from the previous night in which she was quoted as saying “it may be interest rates will have to rise somewhat to make sure our economy doesn’t overheat.” In a WSJ interview yesterday morning, Yellen sought to clarify the remarks, saying she didn’t think there would be an inflationary problem and that interest rate increases were “not something I’m predicting or recommending”.
Economic data overnight had little market impact. The ISM Services index was a little weaker than expected, but it remains at exceptionally strong levels (the second highest on record). Echoing similar themes to the ISM manufacturing index, the survey showed supply constraints were still acute while the prices paid index increased to its highest level since 2008, consistent with rising inflationary pressures. Separately, the ADP employment survey was weaker than expected although, given it has tended to underestimate employment gains in the nonfarm payrolls report, the market looked through the release. Payrolls is released tomorrow night, with the market looking for an almost one million increase in jobs in April.
US rates were little moved by Yellen’s comments, with the 10-year rate continuing to range-trade (it trades just below 1.60% this morning). But market-based inflation expectations continue to move higher. The US 10-year breakeven inflation rate increased 4bps to 2.47%, its highest level since before the ‘taper tantrum’ in 2013. Despite constant reassurances from Yellen and an array of Fed officials that the coming increase in inflation will prove ‘transitory’ (Chicago Fed President Evans overnight said he thought the risk of a major inflation overshoot was “remote ”), markets are evidently a bit more worried. Options prices indicate that the market see a greater than one-in-three chance than US CPI could average more than 3% over the coming five years.
Strong commodity prices have been a factor that has helped to lift inflation expectations. The Bloomberg Commodity index reached its highest level since 2011 yesterday. Copper prices traded above $10,000 again overnight while oil prices retained most of their gains from the previous session after US DOE data showed a much larger than expected oil inventory drawdown (almost 8 million barrels). The Energy and Materials sectors have led gains on the S&P500 overnight.
In the currency market, commodity currencies have outperformed on a session in which the broader USD has tracked sideways. The NZD is back above 0.72, in large part due to the strong NZ employment report yesterday, while the AUD (+0.5%) and CAD (+0.3%) have seen lesser gains. Most other currencies are +/-0.2% from this time yesterday.
Yesterday’s NZ HLFS labour market report was a strong one, showing a fall in the unemployment rate from 4.9% to 4.7% (lower than both the RBNZ’s and the market’s expectations) and stronger-than-expected employment growth of 0.6% in Q1. Wage growth remains relatively modest, for now, with the labour cost index increasing just 0.4% on the quarter and 1.6% on a year ago. While the RBNZ will no doubt argue that employment is still some way from its maximum sustainable level, it’s closer than what it was and appears to be moving in the right direction. We think the unemployment rate is likely to keep declining amidst robust business hiring intentions and, in combination with rising inflation pressures, this will likely see the RBNZ start to raise the OCR next year.
The market bumped up its 2022 OCR expectations slightly after the release. The first 25bp hike is still priced-in for late 2022 with the market ascribing around a 50% chance of a hike by mid-next year. There was more impact on medium-term monetary policy expectations, with the 5-year swap rate rising 6bps on the day to 1.15%. The 10-year swap rate increased 4bps despite Australian rates falling yesterday.
There were several other interesting local developments yesterday, although these weren’t market moving. Barfoot and Thompson data revealed the highest number of house sales for an April in 19 years, reinforcing the extremely strong momentum in the Auckland housing market. However, it’s still probably too early to see the effect of the government’s recent housing policy announcements on the market. At the RBNZ’s Financial Stability Report, the Bank stopped short of giving a firm opinion as to whether house prices were “overvalued” or not, but it did flag that it was prepared to increase LVRs further, or use other tools, if needed.
The preliminary version of the ANZ business survey for May is released today. Last month’s survey showed record high pricing intentions among businesses. The Bank of England monetary policy meeting takes place tonight, with the market expecting the Bank to announce a slower pace of bond purchases under its QE programme. At its current run-rate, the BoE will reach its bond buying target well ahead of its scheduled year-end date, making a slow-down in the pace of purchases likely. Markets will be listening for future policy guidance with the UK economy set to recover rapidly as Covid-related restrictions are removed.
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