Risk appetite is higher at the start of the new month. Bad news is good news, with soft US labour market data providing no smoking gun for an immediate Fed taper of QE, supporting equity markets and driving the USD lower overnight. The AUD has been the best performer, followed by the NZD.
The US ADP private payrolls report showed a much weaker than expected lift of 374k, solidifying the downshift in employment seen in July, where payrolls rose by 326k, attributed to the spread of the delta variant of COVID19. The shortfall of growth in employment had some analysts revising down their expectations for non-farm payrolls at the end of the week. Some reputable analysts now have a projection as low as 400k, with the consensus at 725k. Figures this low likely wouldn’t meet the Fed’s condition of “further substantial progress” to allow a tapering of asset purchases as soon as the September meeting, delaying any tapering announcement to at least November.
The US ISM manufacturing index unexpectedly rose to 59.9, but with a mixed underbelly. New orders were strong, rising to 66.7, but the employment index fell to 49.0, the lowest reading since November, the latter another possible indicator that the labour market has lost some momentum. Supply chain issues remain a predominant feature of the survey and these aren’t likely to disappear in a hurry. Manufacturing PMIs across South East Asia, a hub of global manufacturing including Indonesia, Vietnam, Thailand, Philippines and Malaysia, are all well below 50 due to factory closures amidst the spread of the delta variant. China’s alternative manufacturing PMI measured by Caixin, which captures smaller businesses, fell below the 50 mark to 49.2, where again factory closures would have been a factor with the government trying to stamp out the virus.
The hiccup in global supply chains is still seen to be a temporary phenomenon and the market has got used to the idea so this thematic is no longer holding back risk appetite. Global equity markets have kicked off September on a positive note, with the S&P500 currently up 0.2%, following a 0.5% gain in the Euro Stoxx 600 and solid gains in key markets in Asia. The US 10-year rate got as high as 1.33% at the NZ close, but the softer US labour market indicators have seen it fall to 1.28% overnight, currently back at 1.30%.
OPEC+ held one of its quickest meetings in history, agreeing to stick to the plan of gradually increasing oil production through the next year, unwinding the cuts implemented at the height of the pandemic. A 400,000 barrels per day lift in supply is due next month. Brent crude is little changed for the day at USD0.71.50 per barrel.
In currency markets, the USD has been the worst of the majors overnight, albeit with the BBDXY index only showing a moderate fall of 0.25% for the day. The AUD leads the charge higher, up 0.8% overnight to 0.7375, a further sign that it was far too oversold in late August. There was little reaction to the stronger than expected Q2 GDP print of 0.7% q/q, given the likelihood that Q3 will print well into negative territory, with NAB’s current estimate at minus 3½% q/q.
The NZD has recovered further, up 0.5% overnight to 0.7070, getting closer to the first resistance level of 0.71. A break of that would see the technicians eyeing up the 0.7315 mark, which was the resistance level through much of the first half of the year. The relatively stronger AUD sees NZD/AUD back below the 0.96 mark. The NZD shows small overnight gains on the crosses.
Of some interest for keen central bank watchers, yesterday the central bank of Chile raised its policy rate by a larger than expected 75bps to 1.5%, given its concern about an overheating economy. This followed the Bank of Korea’s 25bps hike to 0.75% last week (which surprised half the market), to rein in surging household debt and house prices, becoming the first developed economic in Asia to kick off a tightening cycle. Also last week, Iceland’s central bank raised rates for a second time this cycle. These all paint a picture of small country central banks not afraid to tighten monetary policy amidst a pandemic, and the RBNZ will likely join that esteemed group early next month.
Yesterday, the domestic rates market showed a notable steepening, against the backdrop of higher US rates but more so alongside a big sell-off in the Australian bond market. RBA buying has recently crunched in Australian rates and the market has been nervous about a possible reversal, and that occurred yesterday with a 9bps move in the 10-year rate. The NZGB 10-year rate rose by 10bps to 1.81%, ahead of the issuance of $500m today and $2-3b of a new 30-year bond in the week after next. NZGBs underperformed swaps, with the 10-year swap rate up by “only” 6bps to 2.03%, its highest close since March. The 2-year swap rate rose by 3bps to 1.32%.
In the day ahead only second-tier economic data are released, including NZ terms of trade, US jobless claims and trade balance. The next key release is the US non-farm payrolls report Friday night.