Risk sentiment soured overnight after a weak US retail sales print, sending US equities much lower and the USD broadly higher. This added to NZD downside pressure yesterday, following the reporting of a single COVID19 case in the community, triggering a restrictive nationwide lockdown and some reassessment of RBNZ monetary policy. Support for the NZD has so far been found at 0.69. The AUD printed a fresh year-to-date low sub-0.7250.
The NZD has been hit by a double-blow over the past 24 hours, with a single COVID19 case in the community in Auckland doing most of the damage followed up by a risk-off overnight session. The NZD currently trades just above 0.69, taking its fall from this time yesterday to 1.6%, which on the global currency scorecard has only been outdone by the Afghanistan Afghani and Mauritian Rupee, some fine company there. On the positive side, support at 0.69 has held and its overnight performance was more middle-of-the-pack, with the AUD, GBP and Scandies doing worst, a hint that selling pressure might be exhausted.
Mid-afternoon the Ministry of Health announced NZ’s first community case of COVID19 since February. By early evening the government announced a full restrictive level 4 lockdown for the entire country for at least three days, extending for seven days for Auckland and the Coromandel Peninsula, sending masses of unmasked kiwis into supermarkets and liquor stores. In overnight news, PM Ardern noted that four new COVID19 cases have been reported, including an Auckland hospital worker.
The announcement of a community case of COVID19 caused an outsized market reaction, with an immediate fall in the NZD and rates, cumulating to a 14bps plunge in the 2-year swap rate from 1.40% (having nudged higher earlier in the day) to 1.26%, with the market dialling back its expectations of near-term OCR hikes. This flowed through across the whole yield curve. For the day, the 2-year swap rate was down 11bps, while the 10-year rate was down 8bps to 1.92%. NZGB yields were 9-10bps lower across the curve, after trading heavy before the COVID19 case was announced.
The timing of the COVID19 case couldn’t come at a worst time for the RBNZ, one day ahead of its MPS, most of which would have been already written. Importantly, the MPC still has time to reassess any initial judgements, including the important rate decision. August OIS closed at 0.44%, implying 19bps of hikes priced for the meeting, down from the 30bps of hikes priced earlier in the day, but the market close was before the country-wide level 4 lockdown was announced, so rate hike expectations have likely been reassessed downwards since.
The restrictive lockdown and unknown spread of the virus has turned an RBNZ rate hike today from a sure thing into a coin toss. Supporting the RBNZ going ahead with a rate increase, the current strong inflationary pressures haven’t magically disappeared and a relatively short lockdown would see a sharp bounce-back in activity, with not much overall economic loss. But even inflation hawks would understand if the RBNZ chose to delay the inevitable tightening, as long as the Bank indicated some intent to get moving once the dust has cleared.
In overnight news, US retail sales for July undershot market expectations, with the headline figure down 1.1%, dragged lower by auto sales, while the ex-autos figure was also weak, down 0.4%. While upward revisions to prior data overstated the miss relative to expectations, the market still saw the result as a bad outcome, following hot on the heels of Friday’s report slump in consumer sentiment. The fall in sales is attributed to some payback from stimulus-induced spending earlier in the year, some sticker shock from higher prices, and a more cautious attitude as the delta variant of COVID19 spreads across the country.
Adding to the gloom, the NAHB housing market index also came in weaker than expected, unexpectedly dropping to a 13-month of 75, even though mortgage applications data have been pointing to a significant housing market slowdown for some time. A weaker than expected result Home Depot didn’t help either, a further indication of some housing market softness. NAHB’s chief economist pointed to higher costs and material access issues holding back home sales.
All this has seen US equities show a chunky fall off yesterday’s record high, with the S&P500 currently down around 1% (having been down 1.4% at its low) and the Nasdaq index is down 1.1%.
Bond investors are obviously a more pessimistic lot as the US 10-year rate jumped higher after the retail sales report, suggesting that they were well prepared for a soft number following the plunge in consumer sentiment. Trading at their low for the day of 1.22% ahead of the release, the yield jumped as high as 1.27% and is currently 1.26%, barely lower for the day. Fed Chair Powell spoke to educators at a town hall meeting but his opening address didn’t touch on the economy or monetary policy. Some Q&A touched on the economy, but nothing of note for the market.
The USD response to the retail sales data was more in tune with the equity market – risk off – sending the USD broadly higher. On the BBDXY index, the USD is up 0.5%, with EUR approaching 1.17 and GBP harder hit, falling to 1.3735. Even JPY is on the soft side, with USD/JPY up to 109.55.
The AUD has trended lower, showing some weakness after the RBA minutes were released, with the market latching onto the headline that said "the Board would be prepared to act in response to further bad news on the health front should that lead to a more significant setback for the economic recovery". The currency has traded to a fresh low of 0.7243 overnight.
The NZD is lower on all the crosses with NZD/AUD trading a wide range of over a cent, trading up just under support of 0.96 prior to the NZ COVID19 case announcement, falling to below 0.9490 last night before recovering to 0.9520.
The overnight GDT dairy auction saw a 0.3% lift in the price index, better than expected and breaking a run of eight consecutive falls since early April. While whole milk powder fell by 1.5%, other products were flat to higher, including a 2.8% lift in cheddar and 4.0% lift in butter.
Finally, the WSJ reported “exclusive” analysis of COVID19 showing that the delta variant appears to be breaking through the protection vaccines provide at a higher rate than previous strains, but infections among the fully inoculated remain a tiny fraction of overall cases (0.1%) and symptoms tend to be milder that don’t require hospitalisation. That figure understates the number of break-through cases, as many vaccinated folk won’t even realise they have COVID19 and therefore won’t be tested, but the analysis highlighted how widespread vaccination can lead to a road to normality.
On the economic calendar, the RBNZ’s statement will be the focus. Overnight, UK and Canadian CPI data, US housing starts and permits and minutes of the FOMC’s July meeting round out the calendar.
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2 Comments
Orr will be very tempted to use this excuse to kick the can down the road for a little longer.
But even Orr knows that by doing so he will just be forced to raise rates even higher later on.
My call is that he will raise by only 25 points today, and by 50 points in October - without this outbreak, it would have been 50 points now and 25 points later. But maybe I am underestimating the RBNZ's shortsightedness.
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