It’s been a quiet overnight session for markets, with equities and bond yields treading water ahead of the nonfarm payrolls report tonight. The USD is weaker overnight, and the NZD has consolidated above 0.72. Commodity prices remain strong.
The market remains in a holding pattern ahead of the nonfarm payrolls report tonight. US equity markets are little changed. The Dow Jones (+0.4%) has made a fresh all-time high, while the NASDAQ (-0.5%) has underperformed again, albeit modestly. The US 10-year yield is at 1.56%, close to where it was this time yesterday.
Ahead of the payrolls report, US jobless claims were lower than expected. The trend lower in jobless claims is indicative of the recovery in the labour market as the economy reopens. The market consensus is for 1 million jobs growth in April and for the unemployment rate to drop from 6% to 5.8%. For context, it took around five years after the post-GFC peak for the US unemployment rate to reach 5.8%.
On the vaccine front, Pfizer and BioNtech announced they would be able to produce 3 billion doses this year, up from the previous 2.5 billion dose estimate from March. The news is encouraging given more countries are now relying on the Pfizer vaccine, including in Europe and Australia, with many having placed age restrictions on the use of AstraZeneca’s vaccine. Separately, the German government pushed back on suggestions from the Biden administration that Covid vaccine patents should be waived.
Commodity prices remain strong. Spot iron ore prices rose above $200 per tonne last night, a new record, while copper consolidated above the $10,000 mark and tin traded above $30,000 for the first time since 2011. Higher commodity prices are consistent with market expectations for a rapid global economic rebound this year.
In currencies, the USD is broadly weaker (except for the GBP – see below), with the Bloomberg DXY index 0.4% lower over the past 24 hours. The USD appears to be consolidating after its big fall in April. Ultra-low US real yields (-0.9% for 10-years) remain a headwind for the USD. The EUR has rebounded from 1.20 to around 1.2060 this morning.
The AUD has recovered from its mid-afternoon sell-off yesterday and is back to around 0.7775 (+0.4%). Headlines that China’s National Development and Reform Commission had “indefinitely suspended ” high-level economic dialogue with Australia caused a short-lived drop to around 0.77 yesterday afternoon. The dialogue breakdown does not appear to imply an imminent impact to Australian trade with China but highlights the current strained nature of the relationship. The market eventually recovered from the headlines, presumably on the basis that Australia’s bulk commodity exports to China will be largely unaffected by the current diplomatic tensions. There wasn’t much market reaction to RBA Deputy Governor Debelle’s speech last night which didn’t provide any major fresh insights.
The NZD was caught in the AUD downdraft yesterday afternoon but, like the AUD, it has recovered overnight amidst the weaker USD backdrop. The NZD is trading at around 0.7225 this morning while the NZD/AUD cross has moved lower over the past 24 hours, to just below 0.93.
The Bank of England kept all its policy settings unchanged at its meeting last night, including its £875b government bond buying target. As widely expected, the Bank reduced its weekly QE bond buying pace, from £4.4b to £3.4b, to ensure it hits its bond buying target at the scheduled year-end date (the reduction to the bond buying pace doesn’t signal a change in the policy stance). Outgoing Chief Economist Andy Haldane, who has been vocal about what he sees as upside risks to both growth and inflation, voted for a reduction to the bond purchase target, effectively calling for the bond buying programme to end in August rather than December. The BoE raised its economic forecasts, with GDP now expected to get back to its pre-Covid levels in Q4 of this year, one quarter earlier than previously forecast, and unemployment now expected to peak at 5.5% rather than the previous 7.75% forecast. Still, Governor Bailey sought to hose down exuberant expectations, saying in the press conference “let’s not get carried away” and pointing out that, even on the Bank’s upgraded forecasts, the UK economy would still lose two years of GDP growth. UK rates and the GBP initially moved higher after the BOE decision, but they have since reversed course and the GBP (-0.1%) has underperformed on the day.
Turning to domestic developments, following on from Wednesday’s strong HLFS labour market report, yesterday’s ANZ business survey was also robust. Own-activity expectations increased to 32.3 in May, from 22.2 in April, putting it above its long-run average and, at face value, consistent with GDP growth of around 3%. Employment intentions were also higher, supporting our view that the unemployment rate will continue to trend lower over the coming year. And pricing intentions reached a fresh record high, for a survey that dates back to 1992, with a net 58% of businesses intending to raise prices. We see the data this week as supporting our call for the RBNZ to commence OCR hikes next year.
The market didn’t react to the ANZ survey release, as is usually the case. Swap rates initially moved higher in the morning, as the market continued to digest the monetary policy implications of the strong employment data from the previous day, before reversing those moves in the afternoon, as Australian rates declined. The 10-year swap rate ended yesterday at 1.89%, 1bp lower on the session.
It’s a busy session ahead with the RBA Statement of Monetary Policy and the US nonfarm payrolls report the highlights.