The US 10-year Treasury rate continues to trend lower, going sub 1.30% to its lowest level in over four months. With inflation seen as less of a threat, the S&P500 has reached another fresh record high, showing small gains. The FOMC minutes didn’t throw up any surprises. Currency movements have been modest, with some small NZD outperformance as rate hike expectations get solidified.
The release of the FOMC minutes this morning didn’t throw up any nasty surprises. There appeared to be a well-rounded discussion on the policy outlook with a mix of views expressed. On meeting the required economic threshold for tapering asset purchases “the committee’s standard of ‘substantial further progress’ was generally seen as not having yet been met, though participants expected progress to continue”. With much revealed on US monetary policy at the meeting and in subsequent Fed-speak, the minutes didn’t add anything new to the debate.
Earlier in the session, the key US 10-year Treasury rate fell further to as low as 1.295%, currently 1.32% and still 3bps down for the day. At face value, the steady fall in this rate over the past month or so signals a combination of some concern about the growth outlook and less concern about inflation, exacerbated by an upheaval in positioning with the market caught short. Theories around some fundamental justification for the lower rates dynamic include the likelihood that the US economy has reached peak growth momentum (valid), concerns about the spread of the delta variant of COVID19 (valid) and that an earlier than previously expected normalisation of US monetary policy will help contain the inflation outlook (laughable).
Falls in both nominal and real rates have been behind the move with their relative importance varying depending on how far back one wants to look. After all, the 1.77% high was reached at the end of March so this rally is already nearly 3½ months long.
The rally in US Treasuries has supported US equities, with the S&P500 currently up 0.2% and notching another fresh record high. The Energy sector has been a laggard, as oil prices have fallen further as traders weigh up the next move from OPEC+ on supply. Brent crude is down another dollar from this time yesterday to USD73.50.
On economic data, the US JOLTs report showed job openings rose to a fresh record high of 9.21m in May with the number of vacancies exceeding hires by 3.28m, a record high as well. The data continues the theme of firms struggling to find workers, with demand exceeding supply. Germany industrial production fell for a second consecutive month, with bottlenecks in the supply of materials continuing to squeeze output.
The European Commission raised its growth and inflation projections for the euro area. Growth is now seen at 4.8% this year and 4.5% next year, while CPI inflation is seen at 1.9% this year, falling to 1.4% next year, similar to the ECB’s outlook. The commentary noted “the European economy is making a strong comeback…we will have to keep a close eye on rising inflation, which is due not least to stronger domestic and foreign demand”. The EC cited new strains on COVID19 as a key risk to the outlook.
In other news, flags have been raised about the possibility of easier China monetary policy. China’s State Council suggested a possible cut to the reserve requirement ratio to help the economy while a former PBoC official said that interest rates should be cut in the second half of the year to safeguard the recovery. This view goes against the prevailing global view where there is the likelihood of future tighter monetary policy in many developed markets while many emerging markets have already begun a tightening cycle. These flags follow data showing a slowdown in China’s growth momentum. Key Q2 GDP and monetary economic activity indicators are released next week.
In currency markets, movements have been well contained. USD indices are flat for the day. The NZD is the best performer, up about 0.2% to 0.7030 with a strong market consensus now that the RBNZ will hike rates before year-end (see below). AUD is flat at 0.75, seeing NZD/AUD nudge up further to 0.9380. The NZD is slightly higher on all the crosses.
The domestic rates market showed a flattening bias. Two other major local banks joined the November rate hike call, meaning that all four major banks now see the RBNZ raising the cash rate before year-end. This makes the RBNZ’s job easier to give a nod to this view next week, and particularly with the market having nearly fully priced this at 22bps. For the Bank to push back on market pricing it would have to argue that current monetary conditions are tighter than desired, which would be a tough sell given the recent dataflow and the NZD languishing at a fundamentally cheap level considering the strength of NZ’s terms of trade.
The 2-year swap rate rose by 1bp to a fresh pandemic high of 0.89%, while 10-year swap fell 6bps to 1.78%, driven by global forces. NZGBs continue to see good demand, despite the market needing to absorb more supply with RBNZ buying under its LSAP a much-reduced force. The 10-year NZGB fell by 7bps to 1.64%.
In the day ahead, RBA Governor Lowe is speaking, but we wouldn’t expect much new information following his talk on Tuesday. The ECB will release the results of its strategic review of monetary policy tonight. The Bank is widely expected to soften its current CPI inflation target of “below, but close to 2%” to allow more flexibility. The economic calendar is light, with the only notable release being US initial jobless claims, for which the consensus expects a further modest fall.