New week sees risk appetite weaken. NZD underperforms, even as global commodity prices push higher. Fed speakers run the party line on no changes to the policy outlook

Markets have begun the new week trading with a more cautious tone after the rollercoaster ride last week. The S&P500 is currently down ½%, led by weakness in the tech sector, with the Nasdaq index down about 1%.

Overnight economic data have been second-tier in nature. US home-builder sentiment was steady in May at a historically high level. The first of the US regional manufacturing surveys for May – the NY Fed’s Empire State survey – showed little change in confidence, as expected and, like a host of other surveys, evidence of higher inflation pressures, with both the prices paid and received indices hitting fresh record highs.

China monthly activity data didn’t provide any support to risk appetite yesterday, being close to expectations apart from retail sales, which were much weaker than expected. All annual figures were exaggerated by last year’s low base, but softer retail sales data provided some succour to the view that consumer demand was lagging, adding to the sense of unevenness during this recovery phase of the cycle.

The US 10-year Treasury rate drifted lower during the Asian trading session, approaching the 1.60% mark, but has since pushed higher to about 1.64%, up about 1bp for the day and 2bps since the NZ close.

After last week’s shocking high US CPI inflation data, which followed the shockingly low payrolls figure earlier in the month, the market is focused on any changes in nuance of view from Fed policy makers. On that note, none is obvious so far. In Q&A after a speech, Fed vice-chair Clarida ran the party line on monetary policy, indicating that “we have not made substantial further progress” on employment, which is the trigger to start tapering bond purchases, and he repeated Powell’s previous comments that the market will get advanced warning before anticipating scaling back the pace of those purchases.

In a CNBC interview, Atlanta Fed President Bostic’s comments were similar, of still needing to make substantial progress before indicating a change in policy, noting that “we are still 8 million jobs short of where we were pre-pandemic”. He said that the Fed had anticipated high inflation readings and that in terms of understanding inflation dynamics he didn’t expect any clear answers “at least until early fall, and it may take longer than that”.

In currency markets it has been a mixed bag for commodity currencies, with CAD up 0.3% for the day, the AUD flat and the NZD underperforming, down almost 0.5%. For the outperformance of CAD we can point to higher oil prices, with both WTI and Brent crude up in the order of 1-1½%, the latter approaching USD70 per barrel, with traders focused on the demand recovery evident as the US and European economies open up. Prices would probably be even higher, if not for some concern about demand in Asia, as the spread of COVID19 flares up in Taiwan and Singapore and new restrictions are put in place there to contain the virus.

Many other industrial commodity prices have also started the week on a positive note, with Bloomberg’s commodity price index up 1.4% for the day. Copper prices are higher, after last week’s selldown, while a host of other metal prices are also stronger on the LME. Iron ore prices on the Singapore exchange rose nearly 3% yesterday to about USD215, having fallen below USD190 late last week. Against a weaker risk backdrop, this dynamic has been an offsetting factor for the AUD. The AUD fell away towards 0.7730 but now trades close to flat from last week’s close around 7770.

The notable underperformance for the NZD doesn’t seem particularly justified, but it does follow a strong session on Friday night.  The currency weakened during local trading hours, falling to as low as 0.7182 overnight, before recovering to 0.7215, about where it was at the NZ close.  NZD/AUD has drifted lower to settle below the 0.93 mark.

Other currencies show modest changes against the USD. GBP is the pick of the bunch, up 0.3% to 1.4145, while EUR and JPY have made smaller gains, the former at 1.2160 and USD/JPY down a touch to 109.15.

In the domestic dates market, NZ bonds continued to struggle to perform against offshore counterparts and swaps. The 10-year NZGB fell by “only” 2bps to 1.88% against a 3½bps fall in the 10-year swap rate to 1.97. The 2-year swap rate remained close to its highest level for the year around 0.55%, with a major bank changing its rate call, now seeing the RBNZ beginning the rate hike cycle about a year earlier than previously expected in August 2022.  BNZ has been in the rate hike camp for some time, with May 2022 pencilled in. NZ’s Performance of Services Index rose to a record high of 61.2, complementing the high PMI manufacturing level and other data which suggests that Q2 got off to a good start.

In the day ahead, Q1 GDP for Japan is expected to show a contraction of about 1.1% while for the euro area a more moderate contraction of 0.6% is expected. UK labour market and US building permits and housing starts round out the calendar.