Risk sentiment is weaker for no obvious reason, with US equities on track for a rare fall today while global bond markets show a broadly-based rally, sending the US 10-year rate down to the low 1.40s. Daily currency movements have been minimal apart from notable weakness in the NZD and AUD.
Newsflow has remained light but there has been a notable deterioration in risk appetite. The S&P500 is on track for its first fall in nine trading sessions, after reaching a fresh record high yesterday, currently down 0.4%, with Tesla stock again weighing on the index, down over 8%. The sector breakdown shows defensive sectors like Utilities, Real Estate and Consumer Staples outperforming.
Global rates show broadly based falls, with market commentary linking it to reports that Brainard could get the nod over Powell for the role of the Chair, but the softer risk appetite backdrop is likely a key factor as well. Fed Board Governor Brainard was reported to have been interviewed for the role of Chair. She is seen to be on the dovish side of the committee regarding monetary policy, possibly even more dovish than Powell, if that is possible, and she favours a tougher stance on big banks. Current Chair Powell’s role expires in February, but the market has hitherto been expecting him to retain the Chairmanship while Brainard is promoted to the head the bank regulation role.
Rates are lower across the Treasuries curve, with a flattening bias, with 10-30 year rates down 7-8bps and the 2-year rate down 3bps, with the market further unwinding Fed hike bets from next year, less than two full hikes now priced in. The 10-year rate has traded down to 1.42%, its lowest level in about seven weeks. The real 10 year rate is down 8bps on the day to a record low of minus 1.21%. European 10-year rates are down about 5-6bps and the UK 10-year rate is down 3bps.
In the currency market, safe-havens have outperformed, with the USD, CHF and JPY the strongest over the past 24 hours, although most movements have been small. The NZD and AUD have been the outliers, down 0.5-0.6% over the past 24 hours and more than half of the fall coming overnight. While the weaker risk appetite backdrop can take some blame, weakness here might also be linked to ongoing concerns about the outlook for China.
Earlier this week the Fed published its semi-annual financial stability report and it warned that stresses in China’s property sector and the financial sector’s high leverage posed some risk to the US financial system, alongside broader contagion risk. Troubled property developer Evergrande will need to pay another $148m in dollar-bond coupon payments by the end of today as another 30-day grace period expires after missing the initial payment deadline. Bloomberg reported some spillover of the property sector’s debt woes into the investment grade bond market, with a particularly large 8-10bps selloff yesterday, following a 7bps selloff on Monday.
The NZD saw an overnight low of 0.7110 and has recovered a little to 0.7125. The AUD saw some support just above the 0.7360 mark. NZD/AUD has been oscillating around the 0.9650 mark and the NZD is broadly weaker on the crosses.
In US economic news, PPI inflation was as strong as expected in October, with the index for final demand surging 8.6% y/y and the ex food and energy index up 6.8%. The goods component tentatively showed signs of easing, with the 0.5% m/m increase the weakest since February, although still uncomfortably high. The data comes ahead of the more important CPI release tonight, expected to show annual headline inflation pushing up to a fresh high of 5.9% y/y, and core inflation of 4.3%. The NFIB small business survey showed optimism falling to a 7-month low and the inflation component rising to a fresh 35-year high. The only positive news in the survey was a lift in plans for capital expenditure.
In NZ, the value of electronic card transactions rose 9.5% m/m in October, with a 10.1% gain for the retail sector, both figures coming off a very low base when lockdown restrictions were more widespread. A further easing of restrictions in November adds to the case for a strong Q4 rebound, but there remains considerable uncertainty on where underlying spending will settle in a COVID-endemic environment next year.
The domestic rates market saw a 2bps rise across most of the bond and swaps curve, although the 2-year swap rate rose by just 1bp to 2.20%.
In the day ahead, the US CPI data tonight have already been noted above, while during the local trading session China inflation data are released.