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US Treasury yields fall back after significant two-day sell-off. Chinese equities well supported after State regulator steps in. No fireworks from RBA yesterday. Dairy prices continue to recover

Currencies / analysis
US Treasury yields fall back after significant two-day sell-off. Chinese equities well supported after State regulator steps in. No fireworks from RBA yesterday. Dairy prices continue to recover
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Overnight, there has been little news but the US 10-year year Treasury yield has fallen modestly after the hefty two-day sell-off that followed the blockbuster payrolls report on Friday. US equities are flat. The NZD and AUD have found some support, helped by a slightly stronger yuan on speculation of more policy support for the beleaguered Chinese sharemarket. The NZD is trading around 0.6075, off yesterday’s fresh year-to-date low.

The new week kicked off with US Treasuries extending the losses seen late last week after the blockbuster US employment report, which showed surprisingly strong gains in jobs and higher wage inflation.  Yields continued to push higher, firstly after Fed Chair Powell’s “60 Minutes” interview, where he reiterated his cautious approach to considering rate cuts, noting the danger of moving too soon, and that it isn’t likely the Fed will be confident enough about the sustainability of the lower path for inflation by the March meeting.

Secondly, the ISM services index released Monday night NZ time rose by 2.9pts to 53.4, with higher new orders, a big jump in employment and, more worryingly, a 7.3pt lift in the prices paid index to 64.0, with Suez and Panama Canal disruptions cited as major factors.  The data, on cue, seemed to support the Fed’s cautious approach to kick-starting an easing cycle.

The US 10-year rate has traded at high as 4.17%, early Tuesday morning NZ time and again overnight, suggesting some initial support for Treasuries at that level and has since fallen back to 4.09%, still well up from the pre-payrolls level of 3.88%. The 2-year rate has followed the same path. After we go to press FOMC members Kashkari and Collins will be on the wires along with a further barrage of speakers in coming days. A short while ago, Cleveland Fed President Mester echoed Chair Powell’s message in saying “I think we will gain confidence later this year, and then we can begin moving rates down” after saying that it would be a mistake to move rates down too soon or too quickly without sufficient evidence that inflation was on a sustainable path.

Yesterday, the RBA kept policy unchanged and further softened the mild tightening bias with “The Board expects that it will be some time yet before inflation is sustainably in the target range…a further increase in interest rates cannot be ruled out.” The muted market reaction reflected the Statement and forecast tweaks being broadly in line with market expectations.

There was more interest in what was going on in China, with Bloomberg reporting regulators planned to update the top leadership, including President Xi, on market conditions and the latest policy initiatives. This followed a series of announcements, with an investment arm of China’s sovereign wealth fund saying it would expand its purchases of ETFs and a number of initiatives from the China Securities Regulatory Commission. Market focus on the President Xi meeting and the announcements drove a strong rally in Chinese equities, with Hong Kong’s Hang Seng index closing 4% higher with China’s CSI300 index up 3.5%. The yuan found some support, and there was some small positive spillover into the AUD and NZD.

The NZD is currently trading around 0.6075, following a fresh year-to-date low just below 0.6050 a little over 24 hours ago. The AUD is trading at 0.6520 after a brief foray below 0.6480. NZD/AUD continues to trade just over 0.93. EUR is steady around 1.0750 with little market reaction to the only notable economic news overnight that German factory orders surged 8.9% m/m in December against expectations of a 0.2% decline due to a sharp lift in “major orders”. Currency moves overall have been modest since the beginning of the week.

In the overnight GDT dairy auction, the price index rose 4.2%, continuing the positive trend since mid-August, over which time prices have rebounded by 30%. In the latest overnight auction, most product prices increased, including gains for whole milk powder of 3.4%, skim milk powder up 4.6% and butter up 10.3%.

On Monday, NZ rates were higher, driven by global forces, including the catch-up to Friday night’s large move in the US and the further lift in Treasury yields during local trading hours.  NZGBs ended the day up 11bps across the curve.  Swaps showed a mild flattening bias, with the 2-year rate up 14bps to 4.88% and the 10-year rate up 10bps to 4.45%.  Since the local close ahead of the Waitangi Day holiday, the Australian 10-year bond future has showed little net change and the US 10-year rate is up a couple of basis points.

In the day ahead the domestic focus will be on labour market.  We’re in line with the market consensus, expecting the unemployment rate to show a 0.4 percentage points jump in Q4 to 4.3%, the highest level in nearly three years.  There is much more upside to come, which will help support a lower trajectory for wages and CPI inflation. Only second-tier global data are released tonight, while Fed speakers will remain out in force.

[chart;daily exchange rates]

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