The main event since Friday has been the US nonfarm payrolls report which showed lower-than-expected job growth but further evidence of wage pressure. The market reaction was consistent with investors seeing less risk of an imminent tapering decision by the Fed, which saw lower bond yields and higher equity markets. The USD has been broadly weaker since Friday given the combo of lower yields and improved risk appetite while the NZD and AUD have been outperformers. On Friday, the RBNZ announced a reduction to its bond buying pace for this week, from $350m to $250m, the lowest weekly pace since the QE programme commenced.
After the solid ADP employment print the previous night, the market was gearing up for a strong US nonfarm payrolls report. In the end, the report was seen as not too strong to instigate a near-term Fed tapering decision, but strong enough to suggest the US labour market remains on a firm recovery path. Employment growth in May was 559k, below the 675k consensus and much lower than the whisper number (thought to be +750k to 1m). Issues relating to labour supply – including generous unemployment benefits, some childcare and schools remaining closed, and apprehension amongst some around the health risks of returning to work – still seem to be constraining employment growth at present. The record high level of US job openings suggests there is no issue with labour demand at present.
The unemployment rate, meanwhile, fell from 6.1% to 5.8% while the average hourly earnings rose 0.5% in the month of May, well above the 0.2% expected by the market. The increase in hourly wages, which was well above expectations for the second month running, suggests firms are having to ‘pay up’ to attract employees in the current environment. Average wages within the leisure and hospitality sector are 7% higher than pre-pandemic levels and up 12% in annualised terms over the past six months.
The market reaction to payrolls was consistent with investors seeing less chance of an imminent tapering decision from the Fed (although it might still merit a discussion at next week’s meeting). The US 10-year rate fell 7bps on Friday, from 1.62% to 1.55%, although it has recovered marginally overnight to trade back at 1.57%. Big picture, the US 10-year remains firmly rangebound, for now, between 1.50% and 1.70%. Equity markets rebounded, with interest rate-sensitive tech stocks leading the way. The NASDAQ is 1.6% higher since Thursday’s close and the S&P 0.7%, with the latter hovering just below its all-time high.
The USD was back under pressure after the payrolls report, hit by a double whammy of lower US Treasury yields and improved risk appetite. The USD is down around 0.7% in index terms since Friday morning, leaving both the BBDXY and DXY indices back near multi-year lows. Within the G10, the NZD and AUD have been amongst the star performers since Friday, up 1.3% and 1.4% respectively. Having toyed with the bottom-end of its recent 0.7100 – 0.7315 range on Friday morning, the NZD is back to around 0.7240.
The CAD has been a notable underperformer, up just 0.3% against the USD, after an underwhelming Canadian labour report (-68k jobs vs -25k expected). The Ontario lockdown was the big factor affecting the labour data and there is sense the numbers should improve next month. The Bank of Canada meets this week and no change in policy setting is expected although the market will be listening out for any update on the Bank’s policy rate outlook, having previously flagged rate hikes in the second half of 2022. The GBP has also underperformed (+0.6% since Friday morning) amidst reports the UK government could push back its reopening date beyond June 21st by a few weeks.
Helping the (modest) rebound in US rates overnight, US Treasury Secretary Janet Yellen said that Biden’s huge fiscal stimulus would be a “plus” for the US even if it contributed to rising inflation and higher interest rates. Yellen noted that “we’ve been fighting inflation that’s too low and interest rates that are too low now for a decade…and if this helps a little bit to alleviate things then that’s not a bad thing -- that’s a good thing.” The implication would appear to be that inflation concerns won’t deter the administration from pursuing its expansionary fiscal policy agenda.
Turning to domestic developments, the RBNZ will buy $250m of government bonds this week, down from the $350m/week pace that it had maintained for the six weeks prior. The RBNZ’s current run-rate for its bond purchases is now less than that of bond tender issuance ($300/$350m a week in June) which means the market will need to start absorbing bond supply from now on. Directionally, the change in supply-demand forces should add some upward pressure to (mainly longer-term) interest rates, although we expect this to be very much a second-order driver compared to changes in global interest rates and the OCR outlook/macro developments. The NZ 10-year bond yield increased 5bps on Friday, to 1.84%, slightly outpacing the 2bp increase in the 10-year NZ swap rate and 3bp increase in the 10-year Australian government bond yield on the session. NZ rates should open lower this morning on the back of the post-payrolls moves in global rates.
In the week ahead, there is a batch of partial NZ economic indicators released tomorrow which will help inform our NZ GDP forecast, which is released next week. We have currently got a flat result pencilled in for Q1 growth compared to the RBNZ’s -0.6% forecast. Also on Wednesday is the preliminary June release of the ANZ business survey. The last survey showed above-average activity indicators and record high pricing intentions.
Offshore, the two main events this week are the ECB meeting and US CPI release on Thursday night. Speculation has cooled that the ECB might announce a reduction to its bond buying pace (having previously decided to ‘frontload’ purchases during Q2). Besides US CPI, which is expected to show year-on-year headline inflation of almost 5%, economic data overseas this week is largely second tier. There are no Fed speakers, with the pre-FOMC meeting blackout period having started.