Flat equity markets, UST10 yields push down to lower end of recent trading range. Currencies largely track sideways, although USD/CNY approaches key 6.40 level. RBNZ MPS today could be a market mover

Global equities are treading water, with not a great deal of newsflow, apart from ongoing soothing words from Fed officials about the inflation outlook. US Treasury yields have pushed lower alongside German rates, while there has been little movement in currency markets.

US equities have flicked in and out of positive territory and the S&P500 is currently flat. The Euro Stoxx 600 index closed flat. There has been slightly more movement in global bond markets, but not much. US and Germany 10-year rates have been following each other, both down in the order of 3bps for the day. During the US session, rates pushed lower, with the 10-year Treasury almost reaching 1.56%, at the lower end of its trading range over the past couple of months.

On the data front Germany’s IFO business survey was stronger than expected, led by the expectations component which rose to a four-year high. By contrast, US economic data were weaker than expected, with home sales much lower, as forewarned by the weaker trend in mortgage applications this year, and consumer confidence fell slightly for the first time this year, led by the expectations component. On a more positive note the “jobs plentiful” index jumped higher to almost reach the pre-pandemic high, a sign of a much stronger labour market.

For another day there has been a plethora of Fed-speak to absorb, but no fresh insights have emerged. Fed vice chair Clarida repeated the official line that he believed current inflation pressures would prove to be largely transitory and on tapering his comments were consistent with last week’s FOMC minutes, “there may come a time in coming meetings, we’ll be at the point where we can begin to discuss scaling back the pace of asset purchases…I think it’s going to depend on the flow of data that we get”. He added that the economic outlook is “very, very positive”, and growth this year could possibly reach 7%, while the April CPI report was an unpleasant surprise.

Chicago Fed President Evan played the inflation-is-transitory card and on policy said “I have not seen anything yet to persuade me to change my full support of our accommodative stance for monetary policy or our forward guidance about the path for policy”. The Fed’s Quarles and Barkin were also on the wires with comments consistent with the official view.

Currency movements have been small, with all key majors currently no different by more than 0.2% against the USD from the NZD close. During the Asian trading session, the NZD trended higher and continued that path through to a peak close to 0.7250 overnight and it currently trades at 0.7230. The upward move was slightly greater than that for the AUD, seeing NZD/AUD up around 0.9330, a level which it has struggled to sustainably break through over the past month.

CNY strengthened to its highest level in nearly three years, with USD/CNY weakening further towards 6.40 but not breaking through, as in January/February. While the PBoC has been “leaning against” CNY strength over the past month with its reference rate sets, our forecasts are consistent with the view that the PBoC will allow CNY to gradually strengthen further from here, driven by fundamental forces.

The domestic rates market saw further modest falls in NZGBs, with another weak RBNZ bond buying auction, with reluctant sellers and the Bank’s actions forcing yields lower for reasons that go against the improving macro fundamentals. NZGB rates were mostly down 2bps against a swap curve that was little changed.

The key focus today will be on the RBNZ’s Monetary Policy Statement this afternoon. Even though the immediate end, or bringing forward the end-date for QE, would make a lot of common sense, we aren’t expecting any policy adjustments. However, a less dovish underbelly should be apparent as the Bank factors in a stronger global backdrop, a tighter labour market than it thought, higher near-term inflationary pressure and much more expansive fiscal policy than expected.

The challenge for the Bank will be to acknowledge the significant progress in meeting its dual inflation and employment mandates without scaring the market into over-reacting with a sharp lift in rates and NZD on the day. Even if the RBNZ remains overtly dovish, the market’s dissection of the Bank’s forecasts and any tweaks in language might be enough to give some support to the NZD on the day.