Equities, bond and currency moves muted as market waits on payrolls. NZD underperforms over the past 24 hours. More RBNZ-speak yesterday, with the message that rates will eventually need to rise

Most markets have gone sideways overnight as investors wait on the US nonfarm payrolls report later this week. There has been little news to drive markets.  The NZD has underperformed, for no obvious reason, and is trading this morning around 0.7235.  NZ rates rebounded yesterday, with the 10-year swap rate continuing to hover around 2%.

There’s not too much to report overnight, both in terms of market movements and fresh developments.  There hasn’t been any major economic data released while central bankers have been reiterating previous views.

Equity markets have shown little movement.  The S&P500 is flat overnight and it continues to sit just below its record high.  There have been further big increases in some of the retail investor-favoured stocks, with cinema chain AMC jumping around 100%, but with little spill-over to the broader equity indexes.  In Europe, the Eurostoxx 600 increased 0.3% to a fresh record high as investors grow more confident in the economic recovery in the region with vaccination now making good headway.

At the risk of sounding like a broken record, global rates continue to track sideways.  The US 10-year rate is 1bp lower overnight, at 1.59%, still stuck in its 1.5%-1.7% range.  Implied interest rate volatility continues to decline amidst the ongoing range-trading environment, with the MOVE index near its lowest level since February and below its five-year average.  The decline in interest rate volatility sits in contrast with the high degree of uncertainty around the inflation outlook.  It’s possible the nonfarm payrolls report on Friday night could shake things up, with the Fed clearly looking for labour market improvement as a precondition for a formal discussion around tapering.

On that note, Philadelphia Fed President Harker reiterated his view that “it may be time to at least think about thinking about tapering”.  The Fed appears very cautious about not wanting to cause another taper tantrum, perhaps hoping that the endless public debate around when it should begin such a discussion might mute its eventual impact.  Meanwhile, the Fed’s Beige Book, released a short while ago, reported a pick-up in economic activity in May and observed that price pressures had increased further last month amidst escalating input costs.  The survey suggested we should expect more of the same going forward as “contacts anticipate facing cost increases and charging higher prices in coming months.”

Oil prices have made further gains, with US West Texas crude hitting its highest level since 2018 (+1% overnight).   Growing market confidence in the global recovery, this week’s announcement from OPEC+ that it intends to only gradually increase supply going forward and diminished expectations for the removal of Iranian sanctions have boosted sentiment in the oil market.  Other commodity prices were mixed, with copper falling around 1%, although it remains above the $10,000/tonne mark.

Currency movements overnight have been limited, with all the G10 currencies within +/-0.2% from the levels at the close of the NZ trading day.  The CAD and NOK have outperformed over the past 24 hours (+0.2%) on the back of higher oil prices.  At the other end of the currency ladder, the NZD is the laggard, down 0.2% since 5pm and 0.3% since this time yesterday.  There haven’t been any obvious drivers behind the underperformance in the NZD, although the moves have been modest.  The NZD trades this morning around 0.7235.

There wasn’t much reaction in the AUD or Australian interest rates to its GDP release yesterday.  The AUD is trading around 0.7750, close to where it was 24 hours ago.  As foreshadowed by the partial indicators the previous day, Australian GDP increased 1.8% in Q1, broadly in-line with domestic economists’ forecasts.  Our NAB colleagues expect continued healthy growth over the next two years and, in that context, they expect the RBA to taper QE and refrain from rolling the Yield Curve Control (YCC) target forward at the July meeting.  Late last month, NAB Rates Strategy estimated that the market was pricing around a 70-80% chance that the YCC bond would not be extended from the Apr-2024 bond to the November-2024 bond.

It was another volatile day in the New Zealand government bond market yesterday.  Continuing the pattern over the past week, yields initially fell further after another poorly offered RBNZ buyback of bonds (the RBNZ having to bid some 6bps below prevailing secondary market levels to source the 2041 bond).  The market then turned around in the afternoon, with the 10-year yield recovering 7bps from its intraday lows to close at 1.78% (+4bps on the day), perhaps with an eye to the forthcoming May-2032 syndication, which is due this month.  The swap curve moved higher and steeper yesterday, with the 5 and 10-year rates rising 2bps and 3bps respectively.  The 10-year swap rate continues to fluctuate around the 2% mark.

There was more RBNZ-speak yesterday, with RBNZ Governor Orr and Deputy Governor Bascand highlighting their expectation that monetary policy would eventually need to normalise, with the caveat that the outlook remained very uncertain and the economic recovery uneven.  In the Stuff article, Orr said the risk of not raising rates could see the return of strong inflation, with flow-on effects to economic activity, welfare and intergenerational equity.  Bascand told BusinessDesk “our big story is, you shouldn’t expect to have these extraordinary emergency monetary conditions forever. ”   In the discussion around current inflation pressures, Bascand highlighted the high level of shipping prices, something that was evident in yesterday’s trade data, which showed international freight costs had risen an eyewatering 52% in Q1, to be up 88% on a year ago.  Bascand said the key would be the extent to which these current supply-driven pressures flow through to inflation expectations and broader wage pressures.

Ahead of the US nonfarm payrolls report tomorrow night, the ADP employment report is released this evening as well as the ISM Services index (with the market likely to attuned to the employment component).  Initial jobless claims are expected to continue their trend lower as the labour market recovers.