Markets have traded with a risk-off tone overnight, with equities and commodity prices falling and the USD strengthening. US Treasury yields have increased after the Fed minutes said a number of members thought it might be appropriate to start discussing tapering in upcoming meetings. Meanwhile, bitcoin had another one of its periodic meltdowns overnight, losing over 30% at one point, before recovering. The NZD has underperformed and is back around 0.7150. The NZ Budget is released this afternoon, with the market looking for a reduction to forecast bond issuance.
The minutes to the Fed’s April policy meeting were released a short while ago. The key market-moving part was that “a number of participants” thought it might be appropriate to “begin discussing” a tapering of its bond buying in the upcoming meetings, provided the economy continued to rapidly recover. Of course, this could just be the start of the discussion and it is clearly the minority view, for now, with the committee still overwhelmingly viewing current inflation pressures as “transitory ”. But the initial market reaction has been to take interest rates and the USD higher. The US 10-year Treasury yield has increased 5bps overnight, to 1.68%, although it remains contained within its past two months’ trading range.
Equity markets are lower overnight although, so far, they appear to have largely brushed off the tapering talk in the Fed minutes. The S&P500 is 0.9% lower, having been as much as 1.6% down at one point, while the Eurostoxx 600 index has fallen 1.5%. The Materials (-2%) and Energy (-3.4%) sectors underperformed amidst falling commodity prices, although both sectors have performed extremely strongly year-to-date.
Commodity prices have come under pressure overnight amidst the broader risk-off sentiment and as China’s State Council warned about commodity prices, calling for stricter market oversight of commodity markets. Copper prices fell over 3% and oil lost 2%, with the latter having been as much as 5% lower at one point. Still, the pullback in commodity prices overnight needs to be seen in the context of the sharp runup this year (the Bloomberg Commodity Price index is still +17% year-to-date, even after this modest correction).
The USD has increased 0.4%-0.5%, in index terms, overnight, effectively reversing the previous day’s decline. Around half of the USD’s overnight appreciation has come since the release of the Fed minutes. Even after its overnight rebound, which is typical on risk-off days, the USD is still trading near multi-year lows.
Commodity currencies have predictably underperformed. The NZD is at the bottom of the currency leader board, showing a hefty 1.3% decline, to around 0.7160. The AUD and NOK are both down around 1%. The CAD is down a lesser 0.5% with a higher-than-expected CPI release seeing it fare better than other commodity currencies. Canadian headline inflation was higher than expected, at 0.5% m/m in April (+0.2% expected), while core inflation increased to 2.1%, its highest level since 2012 and consistent with the Bank of Canada meeting its inflation target.
Bitcoin is back in the headlines after some wild moves over the past 24 hours. Bitcoin fell from around $44,000 this time yesterday to as low as $30,000 – an eyewatering 31% single day decline – before recovering to around $38,000. It’s always hard to pin down the exact drivers but sentiment this past week looks to have undermined by Elon Musk’s about-turn on bitcoin, after he highlighted its significant carbon-intensive energy usage.
There was little movement in NZ rates yesterday, like offshore markets during the NZ time session. The 10-year swap rate continued to hover just below the 2% mark while the 2-year swap rate remained near 12-month highs, at 0.56%. We can expect an increase in domestic rates today, and a steepening of the yield curve, after the moves in US Treasury yields overnight.
Domestic market focus will be on the Budget at 2pm today and the accompanying bond programme update. The Government has said it will “reallocate” some of its recent windfall gain in the upcoming Budget although the Minister of Finance has been adamant he wants to maintain a modicum of austerity. The bond programme is likely to be reduced, given the much-improved fiscal outlook. We have pencilled in a reduction in bond issuance in the coming 2021/22 fiscal year from $30b to $20b (down from $45b in the current 2020/21 fiscal year).
Economic data offshore remains generally upbeat. In Australia, consumer sentiment remained near its highest level since 2010 while unemployment expectations fell to their lowest level since February 2011 (a time when the unemployment rate was hovering around 4.9-5.0%). Australian wage growth was also stronger than expected although it remains relatively subdued, at just 1.5% y/y. The Australian labour market report is released today with out NAB colleagues looking for an above consensus 40k increase in jobs (20k expected) and a fall in the unemployment rate from 5.6% to 5.4% (5.6% expected).