Investors remain cautious, with modest weakness in US equities, while the US 10-year rate has reversed yesterday’s increase, tracking lower to 1.33%. There have been a few updates from various central banks, but none of them market moving. Currency moves have been modest, with the NZD continuing to hover around the 0.71 mark.
US equities have spent most of the session in negative territory, likely some profit taking after a blistering run higher and some ongoing caution around the spread of the delta variant (even if its rate of spread is slowing in many States), while it contributes to a speed bump in the economic growth outlook. The S&P500 is currently down 0.2% while tech stocks have underperformed, seeing the Nasdaq index down 0.7%. Earlier, the Euro Stoxx 600 index fell just over 1%.
There has been a bit of central bank talk to digest overnight. The Bank of Canada left its policy settings unchanged, as expected, and while it acknowledged the weaker than expected Q2 GDP data, the Bank continued to expect the economy to strengthen in the second half. The market continues to expect a further tapering of QE from the current CAD2b per week pace, ahead of higher rates in the second half of next year. There was little net market reaction, but CAD has been on the softer of the ledger and the NZD on the stronger side, seeing NZD/CAD break up through 0.90 for the first time since April.
NY Fed President Williams’ opening comments in a webinar toed the party line, saying that ‘it could be appropriate” for the Fed to begin tapering asset purchases this year and he wanted to see more improvement on employment before being ready to declare the test of substantial further progress being met. There was still a long way to go before reaching maximum employment, the condition for lift off on a higher Fed Funds rate. All this was just a regurgitation of what Chair Powell said at Jackson Hole.
There were some hawkish vibes coming out of the BoE as Governor Bailey spoke before Parliament. He said that he was one of the four members who thought that the minimum criteria for tighter UK monetary policy had been met. Still, he stressed that even with the 4-4 split on the MPC (with one vacancy), those who thought the condition of the forward guidance had been met didn’t consider there were sufficient grounds to push for immediate tighter policy.
The focus in the UK this week has been more on fiscal policy than monetary policy, with the controversial proposed increase in National Insurance, a burden of £12b on workers and companies (worth some 0.6% of GDP), and breaching a promise by the government on taxes. Just before we went to press, PM Johnson won the vote to pass this tax increase, which will take the tax revenue to GDP ratio up to its highest level on record. GBP is little changed for the day at 1.3780.
On the economic front, the only notable indicator was the US JOLTS report, which lags the official employment release by a month, but showed job openings rising to a fresh record high of 10.9m in July and the number of vacancies exceeding hires by 4.3m, also a record. While an indicator of labour market strength, it is also a sign of a big mismatch in the labour market which could take a long time to be resolved.
The US 10-year rate reversed the rise seen over the previous day, falling 4bps to 1.33%, with strong demand at the $38b 10-year auction, the auction yield clearing nearly 1½bps through the prevailing rate at the time.
On a day with only small movements in currencies, the NZD has marginally outperformed overnight and the past 24 hours, currently near 0.7110. The AUD is marginally weaker, seeing NZD/AUD lift a little to 0.9640. The NZD is slightly higher on the other crosses as well.
The domestic rates market performed relatively well yesterday against the backdrop of higher global bond yields, suggesting that NZGBs might now be getting the attention of overseas investors after the rise in NZ-global rate spreads. Yields across the curve were only up by 1-2bps. Swap rates were little changed.
In the day ahead, Fed President Kaplan will be speaking during local trading hours and we’ll see if he has maintained his hawkish credentials or softened his stance in the face of the delta spread and soft payrolls report. Following NZ manufacturing data, which will help firm up Q2 GDP estimates, and China inflation data, the focus will turn to the ECB tonight. A reversal of the increase in bond buying under the pandemic bond buying programme is widely expected to be announced for the quarter ahead.