Ahead of the US holiday weekend there wasn’t a great deal of price action on Friday, as US equities closed slightly higher, US Treasury yields pushed lower and currency markets were relatively flat, although the NZD and AUD showed some modest underperformance for no obvious reason.
The S&P500 spent all of Friday in positive territory and came within 0.5% of the record high set earlier this month before some late selling pressure saw it close the day up less than 0.1%. It was generally a positive risk-on day, which saw the VIX index take a peek below 16, while the US investment grade bond spread on the Bloomberg-Barclays index fell to 84bps, its lowest level since 2007.
There were a number of US economic releases to digest, but none really moved the market. US personal income dropped some 13% in April from the March spike that included stimulus payments, while spending rose 0.5%, as households spent those payments. The monster CPI report earlier this month warned of a sharp increase in inflation but, still, the PCE deflators surprised to the high side, with the core measure up 3.1% y/y. The figure includes price spikes related to the re-opening of the economy and last year’s low base effect, so the debate on whether or not inflation will be transitory will remain unanswered for some time yet.
The US trade deficit for April surprisingly narrowed, as exports recovered and imports fell from a record high. There was little revision to the final reading for consumer sentiment for May, for which the early estimate recorded a drop from April. The Chicago PMI surprisingly rose rather than fell, touching its highest level in nearly fifty years, likely sensitive to new orders for Boeing aircraft that won’t apply to other regional surveys or the nationwide ISM later this week.
President Biden outlined his Budget plan for FY22, proposing $6 trillion of spending that would significantly boost discretionary spending and sharply raise taxes on corporates and high-income households. The proposed fiscal deficit would be 7.8% of GDP, down from the current fiscal year estimate of 16.7%, which includes the substantial pandemic stimulus packages. The Budget will face some opposition in Congress, and it remains to be seen what the final outcome will look like, but suffice to say that the US economy will face a period of high fiscal deficits and rising debt levels for the foreseeable future.
Core inflation above 3% and a rising public debt level – projected at about 112% of GDP in FY22, the highest since World War II – still don’t seem to be of much concern for the bond market, with the US 10-year Treasury rate down by 1bp for the day to 1.59%.
The euro area economic confidence indicator rose to a three-year high, indicative of improving economic momentum in the region as lockdown restrictions ease. The Euro Stoxx 600 index rose by 0.6% to a record high for a second day.
In currency markets, there wasn’t a great deal of movement for most of the majors, with EUR, GBP, CAD and JPY all flat Friday night relative to the NZ close. By contrast, the AUD and NZD were both inexplicably weaker against the backdrop of better risk sentiment – the AUD pushing below 0.7680 before finishing the week just above 0.77, and the NZD trading down to about 0.7215 before closing the week around 0.7250.
The positive link between these currencies and CNY that was prevalent when Trump was in charge has well and truly been extinguished, as USD/CNY pushed down to 6.3685, a fresh three-year low. The market continues to take the view that the PBoC won’t stand in the way of further CNY strength as long as movements are orderly and not driven by purely speculative behaviour. NAB’s Asia-based FX strategist Christy Tan believes that controlling inflation is the strongest of the PBoC’s motivations to allow CNY strength, in light of the strong rhetoric about reining in commodity prices. This could potentially explain the sluggish performance of NZD and AUD against a backdrop of CNY strength.
The domestic rates market saw downward pressure for the NZGB and swaps curves, against the grain of prevailing bond market weakness in offshore markets at the time. Another weak LSAP operation was further evidence that RBNZ buying pressure is distorting the NZGB market – after a month in which NZ spreads against key Australia and US markets have widened – and there are strong arguments for a tapering its bond purchases in the near future to improve market function. The 10-year NZGB fell by 3bps to 1.85% while 10-year swap fell 1bp to 2.02%.
In the day ahead the full ANZ NZ business outlook survey for May should confirm that activity indicators are on a better footing while near-term inflation pressures remain high. The market is looking for a small improvement in the China PMIs this afternoon. The key focus this week is the US non-farm payrolls report at the end of the week, and ahead of that the ISM manufacturing and services indicators are released.