Against a backdrop of strong confidence data, US and European equities trade near record highs while US Treasuries continue to remain range bound. Perhaps the most interesting market dynamic is the commodity currencies languishing again, seeing the NZD back below 0.70.
Another day, another record high set for the S&P500 as the month draws to close. While the index has spent most of the session in positive territory, after a positive start the index has been drifting lower and just slipped into negative as we go to press. The Euro Stoxx 600 index closed up 0.3%, converging towards its record high set mid-month.
Economic news has been positive. The Conference Board measure of US consumer confidence surged to a fresh pandemic high and well above expectations and its long-term average. Record high stock market levels and the reopening of the economy are likely factors behind the strong level of confidence. Furthermore, the closely watched difference between jobs-plentiful and jobs-hard-to-get indicators rose to a 21-year high, indicative of a very tight labour market, but yet to be reflected by the official labour market figures.
Both the WSJ and FT headline their websites with “US home-price growth hits highest level in more than 30 years”, based on the S&P-Case-Shiller index rising by 14.6% y/y – we’d call that a bear market in NZ, with annual house price inflation closer to 30%. Meanwhile UK house price inflation rose to a 17-year high of 13.4%. The common factor here, of course, is central bank monetary policy which has taken rates down to near-zero and fuelled widespread asset price inflation.
Euro area economic confidence – a mix of consumer and business confidence – rose to its highest level in 21 years, a stronger result than expected. The data are consistent with a strong economic rebound as lockdown restrictions ease and activity returns to normal. German CPI data eased, taking the annual gain to 2.1% in June from 2.4% in May, in line with expectations.
The global rates market hasn’t reacted to the strong economic data, with US Treasuries remaining tightly range bound, with the 10-year rate steady at 1.48%.
Despite no sign of weaker risk appetite in bonds, equities and commodities, safe haven currencies have outperformed and the commodity currencies have underperformed again. The NZD has fallen 0.5% overnight to settle just under the 0.70 mark. The AUD has fallen the same and has found some support around 0.7510. CAD is down 0.4%. All this against a backdrop of a fifth consecutive daily gain in Bloomberg’s commodity price index.
The only possible explanation for the weak performance of commodity currencies is some focus on emerging market economies as the delta variant of COVID19 spreads across the world – areas that remain largely unvaccinated. It’s certainly not an entirely convincing explanation against a backdrop of rising commodity prices. The underperformance of the NZD cements its place as the worst performing major currency for June so far with a day of trading left for the month. This milestone comes against the backdrop of our risk appetite index rising to a pandemic high and higher NZ-global rate spreads as the RBNZ looks to be well ahead of the pack in terms of expectations of tighter future monetary policy. Needless to say, NZD weakness continues to look fundamentally unjustified.
The yen has been the best performing major currency overnight, but USD has also made broadly based gains, albeit modest. EUR traded back below 1.19 overnight while GBP found some support just above 1.38. Apart from a flat NZD/AUD cross just above 0.93, all the other NZD crosses are lower.
The domestic rates market showed a flatter curve bias, with longer term rates dragged down by the global forces evident the previous night. The 10-year NZGB and swap rates both fell by 6bps to 1.78% and 1.88% respectively, while 2-year swap was unchanged at 0.79%.
The RBNZ published its Statement of Intent, an annual document that provides a three-year outlook on its strategic priorities. While the document is not meant to be read as giving any near-term policy signal, the foreword noted the substantial monetary and fiscal stimulus and that vulnerabilities still remain, so the recovery needed continued support. The Bank added that “as long as COVID-19 is contained and the global and economic recovery is sustained, eventually economic policy settings can be expected to normalise over the medium term”.
The economic data calendar is full for the next 24 hours but market reaction is likely to be well contained, keeping its powder dry for Friday’s US employment report. The ADP private payrolls indicator has given a misleading steer of late so that release will be treated with caution. Elsewhere, the final reading of the ANZ NZ business outlook survey, China PMIs and Euro area CPI inflation data are the notable releases.