Market movements have been modest ahead of key central bank meetings and key US earnings reports ahead. Improved sentiment on China after the Politburo meeting on Monday has been a supporting factor for risk assets, with the NZD and AUD piggy-backing on a much stronger yuan. Data continue to show contrasting fortunes between the US and Euro area, driving a softer euro.
The Conference Board measure of US consumer confidence beat market expectations, rising to its highest level in two years, with current conditions rising to a more than three-year high and the expectations component up to an 18-month high. The labour market indicator, those saying jobs were plentiful less those saying jobs were hard to get, rose to a five-month high, consistent with a still-strong labour market. At face value, the data suggested that the US economy was resilient despite 500bps of Fed tightening. However, despite the strong data, there was little market reaction, with Treasuries sustaining their earlier price action, leaving 2 and 10 year rates up 4-5bps since the NZ close, the latter currently trading around 3.9%.
It was a contrasting story in the Euro area, with signs that the ECB was getting good traction with its tighter policy stance. The ECB’s quarterly Bank Lending Survey showed very weak demand for loans for companies and soft demand for mortgages and other consumer borrowing. Furthermore, banks further tightened their lending conditions amidst higher funding costs. Another 25bps rate hike by the ECB is a given this week, but the survey adds to the debate on the extent of further tightening required at subsequent meetings. Separately, Germany’s IFO survey showed further slippage in business confidence, leading IFO’s President to suggest that the economy was still in recession.
The weak Euro area data contributed to a softer euro, with EUR down 0.3% overnight to 1.1040, making it the weakest of the key majors we follow. This sees NZD/EUR up a full figure from Monday’s low to 0.5635. Both the NZD and AUD have been supported by improved sentiment on China. The mood improved following the Politburo’s statement on Monday that vowed measures to boost consumption, more support for the property sector and singled out investor confidence and capital markets, even if it was light on detail. That statement boosted Chinese assets. Another strong CNY reference rate fix helped support the yuan, with USD/CNH falling a chunky 0.7% to just below 7.14. Hong Kong and Chinese stock markets closed the day in the order of 3-4% higher.
The spillover from improved China sentiment has seen the NZD sustain a move back over 0.62. Price action has been minimal overnight and it currently sits at 0.6225. The impact on the AUD has been slightly stronger, seeing the AUD at 0.6785 and NZD/AUD push down to 0.9175.
In other news, the IMF upgraded its global GDP growth forecast for 2023 from 2.8% to 3.0%. and left next year’s forecast at 3.0%. The forecasts continue to show a dichotomy between sluggish advanced economies, with growth around 1½% for this year and next, while emerging market and developing economies sustain growth around 4%.
US equities continue to rally, with the S&P500 up 0.5% to its highest level since April last year, amidst an earnings season that continues to track well and signs of economic resilience despite the higher rates backdrop. After the bell, Microsoft and Alphabet report.
Domestic rates only showed small movements yesterday. Swap rates were little changed and NZGBs rose 2-3bps across the curve, with markets in a holding pattern ahead of key Australian CPI data today and the FOMC meeting early tomorrow morning. Australian CPI data are expected to show a shift down in both annual headline and trimmed mean inflation, to 6.2% and 6.0% respectively, the latter in line with the RBA’s forecast back in May. The data will be a crucial input ahead of next week’s policy update, with market pricing currently showing a better than even chance of a 25bps hike.
For tomorrow morning’s FOMC meeting (6am NZ time), a 25bps hike has been well signalled and is more or less fully priced. Focus will turn to guidance on future policy, and the Fed will likely want to keep alive the possibility of a further possible hike later in the year, consistent with its last set of projections, albeit data dependent. Current market pricing suggests a 50% chance of a follow-up 25bps hike by November.
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