Risk appetite recovered on Friday, seeing US banking stocks bounce higher and strong gains in US equities, supported by data showing solid jobs growth. US Treasury yields rose, led by the short end, reducing the extent of easier policy priced in for the Fed over the second half. After a decisive break above 0.63 on Friday afternoon, the NZD finished the week just under 0.63.
Panic selling of US regional banking stocks earlier in the week gave way to a significant short covering rally on Friday. Banks under the spotlight like PacWest Bancorp shot up 82% while Western Alliance Bancorp rose 49%. The KBW banking index and the regional banking index both rose over 4½%, but they were still down for the week in the order of 7-8%. Strong earnings by Apple and other companies supported risk appetite, alongside the solid US employment report. The S&P500 rose 1.8%, trimming its weekly loss to 0.8%.
US non-farm payrolls rose 253k in April, about 70k more than expected, but net revisions over the past two months were minus 149k, allowing interpretation to suit anyone’s prevailing bias. The unemployment rate ticked down to 3.4%, matching the January level of its lowest rate in over half a century, against expectations for ticking higher. Average hourly earnings were two-tenths higher than expected at 0.5% m/m, although this might just reflect compositions effects, with employment weaker for lower-paying industries and strongest for “professional and technical”. The broad trend over the past year remains one of gradually moderating employment growth and wage inflation.
The labour market clearly remains tight, but the report wasn’t strong enough to suggest that pausing rate hikes by the Fed is a mistake, and not weak enough to suggest the Fed needs to ease policy anytime soon. St Louis Fed President Bullard, who sits at the hawkish end of the spectrum, maintained his view that rates will probably need to go higher. He said he is willing to assess the economic data as it comes in but would need to see “meaningful declines in inflation” to be convinced higher rates aren’t necessary. More dovish was Chicago Fed President Goolsbee, noting the work being done by the credit crunch and which has been historically correlated with recessions.
Higher risk appetite and the employment report led US Treasury yields higher, the 2-year rate closing up 12bps to 3.91% and the 10-year rate up 6bps to 3.44%. The short-end led sell-off reflected a paring of rate cut expectations for the Fed over the second half of the year, the market now seeing “only” three cuts.
In other economic data on Friday night, Canada’s labour market continued to show strong momentum, with much better-than-expected jobs of 41k and the unemployment rate steady at 5.0%. German factory orders plunged 10.7% m/m in March, with both domestic and foreign orders contributing.
That strong Canadian employment report drove rates in Canada more than seen elsewhere and supported the CAD, seeing USD/CAD down over 1% to 1.3375, with a strong recovery of oil prices in the order of 4% supporting the move. A weaker USD Friday afternoon helped the NZD make a decisive break above 0.63, but the move wasn’t sustained, and it ended the week just under 0.63.
The AUD had a stronger day, ending the week at 0.6750, seeing NZD/AUD track down from just over 0.94 in afternoon trading to 0.9320. Australian home loans rose 4.9% m/m in March, the first gain in 14 months, supporting a lift in Australian rates. The RBA’s statement on monetary policy added a bit more colour into the decision to raise the cash rate earlier in the week.
The higher rates backdrop drove a weaker yen, seeing NZD/JPY higher at 84.8. NZD/GBP was slightly weaker while NZD/EUR was slightly stronger.
The domestic rates market ended the week with mainly lower rates, with NZGBs down 1-5bps, led by the short-end of the curve. Swaps also showed a steepening bias and similar moves. The pressure on the open will be for higher rates, with Australian 3 and 10-year bond futures up 6-10bps in yield terms on Friday night.
In the week ahead the economic calendar is light. The key release will be the US CPI due mid-week, while later in the week the BoE is widely expected to hike again by 25bps. Tonight sees the release of the senior loan officer opinion survey released by the Fed, which is expected to show a further tightening of bank lending standards amidst the recent banking sector turmoil.
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