US equities fall again, but this time not led by tech sector. US 10-year rate drifts higher. Only modest currency moves; NZD and AUD track sideways. More spending in Australian Budget

US equities have been hit again overnight but this time the sell-off has been broader, while European equities are also much lower. Currency markets haven’t reacted to the sell-off and show only modest moves. The US 10-year Treasury yield has pushed a little higher.

After closing at a record high on Friday, the S&P500 has come under pressure over the last two trading sessions. After falling just over 1% yesterday, the index is currently down 0.9%. A big sell-off of tech stocks was the theme yesterday, dragging down the market but the overnight sell-off has been broader based. While the Nasdaq index opened on a poor note, down over 2%, that index has recovered to about flat. All S&P sectors are in the red. European equities are also weaker, with the Euro Stoxx 600 index down 2%.

Mainstream media are pointing the finger at inflation concerns for driving the weakest in US equities. That is true to some extent, but it may well also simply reflect some profit-taking after a strong upward run. The 10-year US break-even inflation rate is no higher than it was yesterday, currently trading at 2.54% (having traded as high as 2.585% during the previous overnight session). This isn’t a bog-standard risk-off move either, with the US 10-year Treasury rate drifting higher, up 2bps for the day to 1.62%.

In economic news, US job openings surged to March to a record high of 8.12 million in March and the number of vacancies exceeded hires by over 2.1 million. The report noted employers saying that they are unable to fill positions because of ongoing fears of catching COVID19, child-care responsibilities and generous unemployment benefits. Analysts noted these same factors after Friday’s very poor jobs report, which highlighted that supply (of labour) factors are a much more important constraint on the labour market than demand - something that monetary policy is ill-equipped to deal with.

In other economic news, US small business optimism lifted by less than expected, but the detail showed a welcome lift in capex spending plans and a record high selling price index, something we’re seeing in a lot of business surveys around the world, fuelled by higher commodity prices. Median US annual house price inflation jumped to a record high of 16.2% y/y according to the National Association of Realtors. The median price of USD319,200 looks cheap by NZ standards, something that would barely get you a liveable place in Wainuiomata. German investor confidence as measured by the ZEW survey jumped higher than expected to its highest level in 21-years.

The Australian Budget released last night was more expansionary than expected, with higher spending driving less improvement in the underlying deficit – after an estimated underlying cash deficit of 7.8% of GDP in FY21, deficits around the 5% of GDP mark are forecast for the next two years. However, the stronger starting point (better fiscal metrics in FY21) means than the impact on the projected net debt position is not material. S&P maintained its AAA sovereign rating for Australia and reiterated the negative outlook, with risks remaining tilted to the downside. The Budget assumed an iron ore price of only $55 per ton compared to the current $220 level, so analysts see upside risk to the government’s fiscal forecasts.

Market reaction to the Budget was muted. Since the NZ close, the Australian 10-year bond future shows an implied 5bps rise in yield, although some of that preceded the Budget release and is against a backdrop of upside pressure in the US 10-year rate. The AUD showed no apparent reaction to the news.

That the US equity market selloff doesn’t reflect generalised weaker risk sentiment is also evident in the currency market. Moves have been modest while the USD is broadly weaker as well. If this was a risk-off event, then we’d normally see a stronger USD.

The NZD has tracked sideways between about 0.7250-0.7290 over the past 24 hours and currently sits mid-range around 0.7270. The AUD has traded a tight 0.7820-0.7855 range. NZD/AUD is flat around 0.9270. EUR, GBP and JPY all show small gains of about 0.2% against the USD and the NZD is down slightly on these crosses.

NZGBs traded a little heavy yesterday , with a lift of 1-2bps in yield across the curve. LGFA launched an offer of $300m 2031 bonds which might have had some influence on the NZGB market, with swaps outperforming and showing a 1bp fall across much of the curve. There was no market reaction to a stellar 4% m/m lift in electronic card transactions for April, which sets the scene for a much better Q2 result than the weakness seen in core retailing over Q1.

Tonight, the US CPI release is the key economics report, with the market expecting a sharp increase in annual inflation rates for both the core (2.3%) and headline (3.6%).  Never mind, the Fed sees this increase as transitory and it’ll still be some time before that theory can be disproved or not. UK Q1 GDP is expected to show a contraction of about 1.0% q/q, but the monthly track should show some positive growth late in the quarter, the beginning of a sharp recovery as lockdown restrictions ease.