With the Fed’s policy update last week now seemingly a distant memory, global equity markets are pushing higher while the US 10-year rate is stuck in a tight range just under 1.5%. Currency movements have been modest, but the NZD continues to grind a little higher, while GBP has underperformed as the Bank of England gives no hint of tightening policy.
The S&P500 is currently up 0.7%, reaching a fresh record high, while the Euro Stoxx 600 index rose by 0.9%, trading just below its mid-month record. A sense of calm has prevailed, with another round of Fed speakers overnight pretty much ignored. The market has moved on from dissecting every word from the FOMC members. The marginal value of each utterance has quickly diminished to zero and with policy set to remain easy for a long time yet, the natural inclination is to keep buying equities.
A sense of calm also overhangs the US Treasuries market as it remains tightly rangebound for a third successive day, with less than 3bps covering the daily range of 1.475-1.5%.
In overnight news, President Biden said that he had reached a tentative bipartisan deal amongst Senators on a slimmed down infrastructure package worth $1tn. This is well short of the original $2.3tn proposal and doesn’t address the $1.8tn social safety net spending package also previously proposed by Biden. The agreement looks to be funded from unspent money from previous rounds of pandemic-related stimulus measures so it won’t add to the projected deficit. Still, there are a number of potential hurdles in the way before being signed into legislation.
In economic data, US durable goods orders were slightly softer than expected in May, but this was offset by an upward revision to April data and the overall message was that business investment remained on a solid path. Initial jobless claims fell slightly last week, but again were higher than the market expected, showing some flattening in trend after the steady downward path over recent months. Trade data were consistent with a rebound in global trade and a likely flat contribution to Q2 GDP.
European economic data remained on a strong recovery track. Germany’s IFO survey showed business expectations rising to their highest level in more than a decade while France’s INSEE survey jumped to a 14-year high, led by services.
The Bank of England kept its policy settings unchanged but offered a slightly more dovish tone than expected. The Bank upgraded is growth and CPI inflation forecasts, but played the “transitory” card, suggesting that inflation is likely to exceed 3% for a temporary period before returning to the 2% target. The MPC “does not intend to tighten monetary policy at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably”. What got the market’s attention was the comment in the minutes of the meeting that “Policy should both lean strongly against downside risks to the outlook and ensure that the recovery was not undermined by a premature tightening in monetary conditions”.
The lack of any nod to a possible BoE tightening ahead was seen as slightly more dovish than expected, contributing to a small fall in UK rates and GBP underperforming. Against a backdrop of modest currency movements overall, GBP is down 0.25% for the day to 1.3930.
The NZD continues to recover from last week’s hefty loss, up for a fourth successive day and breaking up through 0.7070 overnight, now some 1½ cents higher from last week’s (unjustified) low. The AUD is also up for a fourth day, but NZD/AUD continues to drift higher and is back above the 0.93 mark. China-Australia trade tensions remain high, with China filing a lawsuit at the WTO over Australian anti-dumping and anti-subsidy measures on Chinese exports of railway wheel, wind towers and stainless steel sinks.
NZD crosses are all slightly higher. NZD/JPY has pushed up to 78.3, nearly fully retracing all of the loss seen since the FOMC meeting, and up nearly 3% from its recent nadir, a reflection of higher global risk appetite.
The domestic rates market saw little movement yesterday, given the torpor seen in global markets as rates markets settle down. NZGB and swap rates were flat to a touch lower. There will be some interest in whether the RBNZ leaves next week’s LSAP at $200m (announcement due at 2pm today), as NZDM lifts its weekly nominal bond tender schedule to $500m. If it does, that would be a good test of market appetite to absorb greater bond issuance.
On the economic calendar, there will be some interest in US personal income and spending figures for May. The former should still be falling back to Earth after being bumped higher by stimulus payments, while it will be interesting how much of that has flowed through into spending. The PCE deflators ought not to surprise, given the steer from previously released strong CPI data.