After a quiet Asian and European morning session, risk appetite improved during US trading, with US equities up over 1% and the NZD leading the charge after last week’s underperformance. Bonds are well bid, with global rates drifting lower.
Newsflow has been light to start the week with no notable global economic releases and little much else, but that hasn’t prevented a positive risk tone to take hold. The S&P500 is currently up 1.3%, led by some strong gains in big tech stocks ands the Nasdaq index is up 1.7%.
Media are reporting less concern about the inflation outlook, at least for a day, and there is an element of truth to that. The US 10-year implied break-even inflation rate fell last week by over 10bps at one point. This came alongside a notable fall in oil prices, as is typical, but overnight we’ve seen oil prices bounce back strongly but only a small upward movement (less than 2bps) in the break-even inflation rate.
Oil prices are up 3-4%, with less concern about the possibility of a short-term ramp-up in supply from Iran after the country said that there are still differences on sequencing and verification relating to talks with world powers on the 2015 nuclear agreement. Furthermore, a Goldman Sachs report said that demand would be strong enough to absorb extra supply and Brent crude would hit USD80bn the next few months.
Higher oil prices have not concerned the bond market, with the US 10-year rate down 2bps for the day to 1.60%, after trading overnight at a 2-week low of 1.59%. Key European rates are also down in the order of 1-2bps.
FOMC members continue to remain unconcerned about the inflation outlook. Fed Governor Brainard ran the party line in calling the lift in inflation as likely temporary, being associated with economy reopening and bottlenecks, and referring to “well anchored” longer-term inflation expectations. Atlanta Fed President Bostic ran the same line, calling the lift in inflation as temporary. St Louis Fed President said that it wasn’t the time to talk about changing the parameters of monetary policy, saying “when you’re in the crisis I think you should make sure you’ve exited the crisis aspect before you think about changing policy. We’re not quite there yet”. He added that he expected to see more inflation but “it’s mostly temporary”.
In currency markets, higher risk appetite has driven broadly based weakness in the USD. The NZD heads the leaderboard, with a 0.6% gain to just under 0.7220, following its undeserved underperformance last week. In our FX weekly update yesterday we noted our positive outlook this week, with the RBNZ MPS in sight and an expected less-dovish underbelly. The NZD has been locked in a 0.71-0.73 range and a topside break wouldn’t surprise, with the currency lagging the improving macro backdrop so far this year.
It wasn’t a market-mover, but NZ real retail sales were much stronger than expected in Q1 at 2.5% q/q, continuing the run of positive NZ economic releases, with the data reducing the chance of a negative GDP print for the quarter. Furthermore, timelier data suggest that the economy is on a much better footing in Q2. All this, and much looser-than-expected fiscal policy outlined in last week’s Budget, are some of the variables the RBNZ should be factoring in at its MPS update tomorrow.
The AUD is only up about 0.3% to 0.7755 so NZD/AUD has pushed back up through 0.93. The AUD temporarily weakened during the local session after reports that China looked to step up its campaign to rein in higher commodity prices with a warning from the National Development and Reform Commission that the government will show zero tolerance for monopoly behaviour and hoarding, after calling a meeting of leaders of the country’s top metals producers. Steel and iron ore prices fell, with the latter trading below $178 on the Singapore exchange, since recovering to $185 overnight.
Other major currencies such as EUR, GBP and JPY show modest 0.1-0.3% gains against the USD so NZD crosses are all higher.
The NZ rates market had a quiet start to the week. NZGBs were down about 1-2bps across the curve, with the RBNZ’s LSAP not particularly well offered. In the swaps market, the 2-year rate rose 1bp to 0.54%, with some final positioning ahead of the MPS, while the 10-year rate fell 1bp to 1.92%.
On the economic calendar, tonight sees the release of Germany’s IFO survey, US consumer confidence and new home sales, while there will be more headlines from FOMC speakers, including Fed Presidents Evans and Barkin who discuss the economic outlook.