It’s been reasonably quiet overnight with equity markets and bond yields pulling back slightly and the NZD dipping back below 0.68. US CPI is focus in the session ahead. Yesterday, we revised up our NZ Q3 GDP forecast and now look for GDP to fall “only” 4% in Q3.
There hasn’t been much news overnight to drive markets, as investors await more scientific findings on Omicron and major central bank meetings, including the Fed, next week. The S&P500 is down 0.2% overnight, consolidating after its strong run higher earlier in the week. The NASDAQ is off 0.8% while the EuroStoxx 600 was marginally lower. In the bond market, the US 10-year rate is 4bps lower, to just below 1.50%, with the yield curve resuming its flattening trend.
In economic data, US weekly jobless claims fell to their lowest level since 1969, at just 184k, although issues with seasonal adjustment (related to the timing of Thanksgiving) look to have been at play. Looking through the week-to-week noise, the trend in jobless claims remains firmly lower, indicative of a strengthening (and very tight) US labour market. Market reaction to the data was limited, with investors firmly focused on the US CPI release tonight. Headline US inflation is expected to hit an almost 40-year high of 6.8% y/y while core inflation is expected to reach 4.9%, which would be its highest level since the early 1990s. In China, PPI inflation was much stronger than expected, albeit slightly lower than the previous month, at 12.9%, while consumer price inflation remains much more subdued, at just 2.3%.
China has taken steps to cool the appreciation in the CNY, which hit a 3½-year high against the USD earlier in the week (the official trade-weighted CNY had also reached its highest level in over six years). The CNY is 0.5% weaker overnight, its biggest daily fall since June, after the PBOC announced a hike in the foreign currency reserve requirement ratio, from 7% to 9%. Earlier, the PBOC had signalled its discomfort with the currency’s appreciation by setting the CNY fix at a weaker than expected level. The PBOC last hiked the foreign currency reserve requirement in June, after which the CNY weakened around 2.5% over the following two months. The CNY has been trending higher amidst large foreign inflows into the Chinese government bond market, given its relatively high interest rates and entry into major global bond indices, with China’s large trade surplus another supportive driver of the currency.
Movements in the major currencies have been reasonably contained (except for a 1.3% fall in the Norwegian krone). The modest pullback in equities has been mirrored by small falls in the NZD and AUD, both currencies down by around 0.3% overnight. The NZD is hovering just below the 0.68 cent mark while the NZD/AUD cross is just below 0.95, its lowest level in two months.
Ahead of the ECB meeting next week, Reuters reported that the central bank was considering boosting its existing Asset Purchase Programme (APP) when its (larger) pandemic bond buying programme rolls off in March. According to the report, options include setting a bond buying target for the APP to last until the end of 2022 or temporarily increasing the monthly APP bond buying amount from €20b, but with guidance that it will likely be tapered going forward if the economy performs as expected. The ECB is balancing how to wean the market off its huge bond buying without causing a shock to peripheral bond markets while keeping its options open for monetary policy beyond 2022 in an environment of heightened inflation uncertainty. Separately, Bloomberg reported that the ECB was considering tweaks to its reinvestment policy for bonds bought under the pandemic bond buying scheme, including applying more flexibility across countries (i.e. skewing reinvestments towards more vulnerable sovereigns like Italy) and extending the timeframe over which matured bonds are reinvested. European 10-year bond rates were down 3-4bps overnight, similar-sized movements to the US 10-year rate, while the EUR was 0.4% weaker.
Turning to local developments, yesterday we revised up our Q3 GDP forecast after the release of more (stronger than expected) partial indicators. We now look for GDP to fall “only” -4% in Q3, when the data are released next week, compared to our previous estimate of -7%. The RBNZ had also forecast a 7% fall in Q3 GDP, so something in the region of -4% would represent a meaningful upside surprise and helps explain the ongoing capacity constraints in the economy. That said, it’s likely that growth doesn’t bounce back quite as strongly in Q4 and Q1 as we had previously been thinking. Meanwhile, job ads on SEEK rebounded strongly in November, by 5.1% on a nationwide basis, putting them back within vicinity of their recent all-time highs, symptomatic of the extremely tight labour market.
Yesterday saw curve steepening in New Zealand, with a 1bp fall in the 2-year swap rate contrasting with a 6bps lift in the 10-year rate. Government bond yields were up by even more, by as much as 10bps on the 20-year bond, after yesterday’s tender saw relatively modest demand, especially for longer maturities. Despite yesterday’s corrective move, the New Zealand yield curve remains flat, with the difference between 5 and 10-year swap rates just 5bps, near its lowest level since the GFC.
The focus of the session ahead is US CPI, the last major data release before the Fed’s policy meeting next week, at which is it widely expected to announce an acceleration of its tapering pace. Locally, the Manufacturing PMI is released as well as monthly electronic card spending data.
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