Market moves have been reasonably modest overnight. Bond yields have rebounded after their recent declines, with the US 10-year rate back above 1.60%, while equity markets are largely unchanged. The GBP has outperformed after the usually dovish MPC member Vlieghe outlined a scenario where the BoE could hike rates early next year, while the NZD is trading around 0.73. Yesterday saw another big jump higher in the NZ 5-year swap rate as the market continued to digest the implications of Wednesday’s RBNZ MPS.
There hasn’t been much news to move markets over the past 24 hours, with only second-tier economic data released. US jobless claims continue to trend lower, falling to a post-pandemic low of 406k last week, a sign of continued improvement in the labour market. Durable goods orders unexpectedly fell in April although this was blamed on the semiconductor shortage hitting auto production. Pending home sales were also weaker than expected, with the previous rise in mortgage rates likely dampening demand. There was nothing in the data to change the market’s prevailing narrative that US (and global) growth is set for a rapid expansion in the coming quarters, with supply constraints the only real obstacle.
On that note, Dallas Fed President Kaplan, one of the few Fed officials to openly call for a discussion around tapering, co-authored an article overnight arguing that supply factors were weighing on employment and “these factors may not be particularly susceptible to monetary policy.” The implicit message seemed to be that the Fed shouldn’t be distracted by the shockingly low payrolls number last month, given it was likely reflective of weakness in labour supply, rather than demand.
Negotiations between Democrats and Republicans continue over Biden’s proposed infrastructure bill. Republican senators raised the size of their proposed bill to just shy of $1 trillion but continue to refuse higher corporate tax rates to fund it, a key Democrat demand. Democrats recently lowered their proposal from $2.3 trillion to $1.7 trillion. The Democrats can push through their proposal without bipartisan support, but only if they can keep all their senators in line. Separately, the New York Times reported that Biden’s forthcoming Budget document, which is due for release tonight, will show annual deficits of more than $1.3 trillion over the next 10-years. While not new news as such, it is a reminder that fiscal policy in the US is likely to remain very stimulatory for the foreseeable future.
Bond yields have bounced back overnight from their range lows. The US 10-year rate, which hit 1.55% yesterday morning, is back to 1.61% (+3bps on the day), while the German 10-year rate reversed yesterday’s fall, rising 3bps to -0.17%. Global rates remain firmly rangebound, for now, with the US 10-year rate having been stuck between 1.50% to 1.70% over much of the past two months.
Equity markets have shown little change overnight, with the S&P500 up just 0.1% and the NASDAQ flat. Industrials and materials stocks have outperformed, reflecting firmness in commodity prices over the past 24 hours (copper +2.5%, nickel +3.5%).
Currency moves have been mixed. At a headline level, the Bloomberg USD index is unchanged over the past 24 hours, but this belies divergence amongst different currency pairs. JPY is the standout underperformer, with USD/JPY up 0.6%, to an almost two-month high, just below 110.0. USD/JPY tends to be positively correlated to US Treasury yields. The EUR and AUD are little changed from this time yesterday. There hasn’t been much market reaction to yesterday’s news that the state of Victoria would enter a ‘circuit breaker’ lockdown until the 3rd of June, after another 12 new Covid-19 community cases were recorded.
On the other side of the ledger, the GBP has appreciated 0.7% to an almost three year high, above 1.42, following comments from BoE MPC member Vlieghe. Vlieghe, usually considered a ‘dove’ on the committee, outlined a range of scenarios for the economy after the government stops its job support scheme. But the market zeroed in on the upside scenario, which Vlieghe outlined would be consistent with a rate hikes “soon after” the first quarter of 2022. The Bank of Canada, RBNZ and Bank of England are amongst central banks which the market expects to raise rates next year.
The NZD is around 0.25% higher overnight and trades this morning around the 0.73 mark. The NZD/AUD cross has nudged up to a four-month high, around 0.9425.
In the domestic rates market, there was another big move higher in the 5-year swap rate yesterday, as the market continued to digest the implications of Wednesday’s RBNZ MPS, which signalled OCR hikes from mid-2022. Position unwinds likely exacerbated the moves in relatively illiquid conditions. The 5-year swap rate was the standout mover on the curve, moving 8bps higher to 1.39%, compared to 2-3bps increases for the 2 and 10-year rates.
In contrast, government bond yields were little moved with only a 1bp increase in the 10-year yield and small falls in yields beyond that point. Yesterday saw strong demand in the weekly government bond tender and, with the RBNZ set to buy another $350m of bonds next week, this saw government bonds outperform. Swap spreads widened by as much as 6bps around the 5-year maturity point (i.e. the 5-year bond yield rose by 6bps less than the 5-year swap rate), which is a relatively large move for this series.
There was little in the way of new information from RBNZ Governor Orr’s (and some of his senior officials) testimony to the FEC committee. They reiterated that the labour market, while “very resilient”, was still shy of being at maximum sustainable employment. Of course, with the RBNZ only forecasting the unemployment rate to tick down from the current 4.7% to 4.6% by Q2 2022, there is plenty of scope for positive surprise on this front (BNZ’s economics team expects it fall below 4% next year).
Finally, in some potentially encouraging news, the FT reported on scientists in Germany which have claimed to have come up with a solution that could prevent the rare cases of blood clotting that have occurred amongst AstraZeneca and J&J’s Covid-19 vaccines. Their thesis has not been peer reviewed but, if successful, it would hopefully reduce vaccine hesitancy in those countries relying on AstraZenaca and J&J.
The focus tonight will be the US personal income and spending report for April, with the market looking for a big rebound in the core PCE deflator, the Fed’s preferred inflation measure, from 1.8% to 2.9% y/y.
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