After yesterday’s 4% plunge in the S&P500, investors remain cautious. Growth fears for the US economy have resulted in notable weakness in the USD while US rates have pushed lower, led by the short-end of the curve, as traders pare bare monetary policy tightening expectations a little. The NZD has traded back up to 0.64.
Risk sentiment remains on the soft side, with the VIX index hovering around the 30 mark and after the plunge in US equities yesterday there has been no big bounce-back. The S&P500 has spent most of the session in negative territory and currently shows a small increase as we go to print. European markets played catch-up to Wall Street, with the Euro Stoxx 600 index down 1.4%.
There has been further sign that fears of higher US inflation have morphed into fears of weaker US growth, with US Treasuries showing lower yields again and there is notable weakness in the USD. Second-tier economic data released in the US overnight were all on the softer side of expectations supporting this move.
US existing home sales fell 2.4% to their lowest level in almost two years, continuing the string of indicators suggesting the housing market has turned downwards, with much higher mortgage rates and a plunge in mortgage applications portending a much deeper downturn ahead. The Philly Fed index plunged to 2.6, although some of the detail wasn’t as bad, with new orders and shipments actually rising, and some evidence of easing supply chains and price pressures. Initial jobless claims rose for a third successive week to 218k, still historically low but its highest level since January.
The fall in US rates has been led by the short end of the curve, with the 2-year Treasury down 6bps for the day to 2.61% and the 10-year rate down 3bps to 2.85%, after pushing to as low as 2.77% overnight.
USD indices are down about 1% for the day, with most of the majors showing at least a 1% gain against the USD since this time yesterday, with smaller gains for JPY and CAD. Traders have been significantly long USD for some time, so the change in sentiment might reflect some paring of those positions in anticipation of more protracted weakness ahead, although there have been many false breaks lower for the USD to have any confidence in this view. The US economy still looks in much better shape than others.
Against the backdrop of a weaker USD, the NZD has managed to recover to 0.64 while the AUD has recovered to 0.7060, consistent with the dynamic over the past six months of seeing sub-0.70 levels not being sustained for very long. The NZD/AUD has been tightly range-bound for the past two weeks and hovers just above the 0.9050 mark. Australian employment growth for April was on the soft side, but not enough to prevent the unemployment rate falling to 3.9%, its lowest level since 1974, consistent with the theme of a tightening labour market.
EUR has returned to 1.06, GBP has returned to 1.25 and USD/JPY is down to 127.70, with NZD crosses against these majors all higher from this time yesterday, but slightly lower from levels at the NZ close.
There was nothing in the NZ Budget to perturb the market. The size of the debt programme was increased by $7b per annum over the next three fiscal years to $25b, with $5b per annum of that accounting for the government buying back RBNZ bond purchases under the QE programme (as previously announced) and the rest representing some modest fiscal slippage. As widely telegraphed in advance, the return to operating surplus was pushed out to FY25. Next year’s operating deficit was revised up from $0.8b to $6.6b.
The bond market slightly underperformed swaps, perhaps reflecting the likely greater NZGB issuance ahead, where we estimate the weekly tender schedule will double from $200m to $400m from July. There was nothing in the Budget to change monetary policy expectations for the period ahead. The 5 and 10-year NZGB rates fell 1bp, while the equivalent swap rates were down 3-4bps.
There was a significant steepening in the inflation-indexed bond curve, with the spread between the Sep-2025 and Sep-2035 linkers steepening by a massive 35bps. NZDM is looking to buy back the shorter-dated bond, while issuance of the Sep-2035 linker will be increased.
In the day ahead, NZ trade data are expected to show ongoing deterioration in NZ’s external accounts, with imports growth running significantly higher than exports. Japan’s CPI will show a rare lift above 2%, as last year’s fall in communication prices drop out of the annual calculation, but core measures are expected to remain uncomfortably low for the BoJ (but perfectly fine for all citizens bar those employed at the Bank). Tonight, UK retail sales data are expected to show another monthly decline, although not as bad as seen in March.