On a quiet news day, global equity markets have continued to trend higher, with the S&P500 printing a fresh record high. Bond markets have been well contained, albeit with a continuing push higher in break-even inflation rates across the US and Europe. Currency markets remain in a consolidation mode, although a better-bid USD overnight has seen the NZD trade near the bottom end of its range for the day, currently 0.7160.
Early in the session the S&P500 was up as much as 0.7%, making a fresh record high, supported by some further strong earnings reports and better than expected consumer confidence data, before paring gains. The index is currently up 0.3%. The Euro Stoxx 600 index closed up 0.8%, within 1 point of breaking its August record high.
The market was braced for another fall in the Conference Board measure of US consumer confidence, but it unexpectedly rose by 4pts to 113.8. The rise was likely driven by an easing of COVID19 concerns more than offsetting the impact of rising inflation, including higher gasoline prices. Year-ahead inflation expectations jumped 0.5% to 7.0%, a 13-year high. New home sales also beat market expectations, rising to 800k, in line with the recent lift in mortgage applications.
Bloomberg reports that defaults on offshore bonds from Chinese borrowers have set an annual record (currently $8.7b), more than two months after defaults from onshore bonds topped their prior peak. The real estate industry has made up one-third of the offshore bond defaults as the government has pushed to cap property-related debt, crimping refinancing capabilities. Chinese authorities are pressuring Evergrande’s founder and billionaire to use his personal wealth to prop up the company. Another delayed USD bond coupon will need to be paid by Friday to avoid default for another week.
The bond market has had an uneventful trading session, with a modest flattening bias in the US Treasuries curve, with upside pressure in short rates and downside pressure in longer-term rates. The 10-year rate is about 1bps lower from the level at the NZ close to 1.62%. Upward pressure remains evident for break-even inflation rates, with the US 10-year on track for a record close, currently up 2bps to 2.69%, while the EUR 5y5y forward break-even inflation rate shot up another 5.5bps to 2.08%, taking its gain over the past week to 18bps.
In currency markets, the USD has been better bid overnight, seeing the NZD and AUD push down to 0.7160 and 0.7500, respectively, albeit little changed from this time yesterday and consistent with the consolidation theme over the past week. The yen has been the weakest of the majors, down 0.4% over the past 24 hours and seeing NZD/JPY up slightly to 81.7, while other NZD crosses are little changed.
In the domestic rates market, the one-sided market at the short end of the curve remained, with payside pressure in swaps pushing the 2-year rate up 4bps to a fresh near 3-year high of 2.03% and the 5-year rate reaching a similar milestone, up 5bps to 2.44%. This flowed through into the NZGB market, with notable flattening pressure on the curve. The 10-year swap and NZGB rates rose by only 2bps.
In the day ahead, the final reading of the ANZ business outlook survey will be of some interest, but we’re more interested in Australia’s CPI report. The market expects the trimmed mean estimate, the RBA’s preferred core measure, to be 0.5% q/q. A figure of 0.6% or higher would put the annualised rate close to the middle of the RBA’s target range and add fuel to the market’s view that the RBA will have to tighten policy much earlier than the 2024 conditional date guided to so far.
Tonight, US trade and durable goods orders data will be followed by the Bank of Canada’s policy update. The central bank is widely expected to halve its asset purchase programme to $1b per week, but more interest will lie in rates guidance and whether it pushes back on the market bringing forward market pricing, where a series of rates from April next year is now well priced.