US markets are closed for a public holiday so it has been a quiet start to the week, but the year has begun on a risk-positive note, with stronger equity and bond markets, a reversal of how last year panned out. The Euro Stoxx 600 index closed 0.5% higher, now up for 9 of the first 11 trading sessions of the year and up 7% year-to-date already. US S&P futures are down slightly on the day, with the index up “only” 4.2% year to date. Global rates show little change overnight but meaty falls year-to-date, with the US 10-year rate down 37bps and NZ’s 10-year NZGB down 41bps. Currency moves for the day have been small, with year-to-date moves showing JPY and the AUD the strongest of the majors, and the USD on the backfoot. NZD/USD is modestly higher year-to-date but weaker on all the key crosses.
With the US on holiday, it’s a good day to kick off Markets Today after an extended break and catch up with key developments year-to-date. The past 24 hours have been uneventful but for readers just returning to work this week after an extended break, such as your scribe, key developments since we signed off before Christmas have been:
(1) China’s COVID wave proving to be more widespread than expected, after abandonment of the zero-COVID policy. This suggests an earlier move to herd immunity and thus a likely earlier economic rebound and less drawn-out supply disruptions.
(2) a collapse in European gas prices, supported by much warmer than usual winter weather conditions. The TZT1 future is down to €55/MWh, down over 60% year-to-date, down from the August peak of €345/MWh and now well below the level prevailing before Russia invaded Ukraine.
(3) the market testing the BoJ’s resolve to keep the 10-year JGB at, or below, 0.50% and speculation that the life of yield curve control policy is drawing to a close.
(4) increased confidence that US inflation has peaked, helped by an in-line CPI report showing reduced inflation pressure, lower than expected wage inflation, and a meaty fall in the ISM services index. These forces support the notion the Fed is nearing the end of its rate-hiking policy.
The net effect of these forces has been “risk-on”. Alongside stronger world equity markets, global rates have notably fallen as well, offering strong early-year gains for most investors. Estimates of global growth in the year-ahead will be on their way up, as economists factor in a stronger China growth outlook and a shallower Euro area recession. The US is losing, or already lost, its growth-leader moniker. This dynamic, alongside the more benign US inflation backdrop and the near-end of the Fed’s tightening cycle, have seen the USD the worst of the key major currencies this year, adding to the downturn seen during Q4 last year.
The stronger NZD this year has so far only reflected USD weakness, with key NZD crosses all lower, particularly against the resurgent yen and strong AUD, the latter being a beneficiary of the stronger China growth outlook and thawing political and economic relations between China and Australia, as President Xi looks to focus on economic performance for the year ahead. For a full rundown of currencies and our up-to-date views, see the FX page in our Markets Outlook published yesterday.
Domestically there has been little news, but in the day ahead, the NZIER’s quarterly survey of business opinion is likely to show further falls in confidence and activity indicators, as last month’s ANZ survey showed, and there is the hope that this will filter through into signs of reduced pressures on capacity and weaker pricing measures.
Domestic rates showed small movements yesterday but for the year to date the global backdrop has driven local rates a lot lower. The 2-year swap rate closed yesterday at 5.03%, down 35bps so far this year while 10-year swap is down 55bps at 4.26%, a 20bps flattening of the curve, reversing the notable steepening over the last three weeks of December. The OIS market is pricing a near-even chance of a 50bps or 75bps hike at the RBNZ’s February MPS, compared to a near full chance of a 75bps hike priced in the lead-up to Christmas. A much lower than expected CPI print next week could see expectations shift even closer to 50bps.
Following the NZ QSBO today, China activity data will show the full force of the rapid spread of COVID19 on reduced retail sales and other activity indicators. The data should be largely ignored by the markets, which are focused on the near-term bounce-back in activity. Key data tonight include UK labour market indicators and Canadian CPI.
The key release this week will be the BoJ’s policy and economic update tomorrow. The JGB market looks even more dislocated than when the BoJ stepped in just before Xmas, surprising the market with a widening the allowable trading range of the 10-year rate to 0.5% – purporting to help market function than signalling a change in monetary policy. This policy supported the yen and expectations that the BoJ will need to adjust policy further, either at this meeting or the next one, have been instrumental in driving further yen strength this year. The BoJ has been buying record amounts of JGBs to prevent the 10-year rate from rising too far above 0.5% and this policy looks unsustainable.
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