US government shutdown finally ends; US equities show a decent fall, dragged down by the tech sector. Market pares Fed easing expectations. December cut no longer seen as likely. US Treasury yields push higher

The end of the US government shutdown has been met with a decent fall in US equities and slightly higher US rates, as expectations for Fed easing fade.  Despite that backdrop, the USD is broadly weaker.  The NZD has pushed up to 0.5670 and NZD/AUD recovered all of its loss following the strong Australian labour market report, with the AUD underperforming overnight.

The US House passed a temporary funding bill and Trump signed legislation that ended the 43-day government shutdown.  But with funding secured through to only 30 January, another shutdown early next year could be on the cards. Estimates suggest the shutdown would have subtracted about 1.5 percentage points off Q4 GDP, but much of this will be quickly retraced over coming weeks.

In coming days, the BLS will release an economic calendar.  There will be no October CPI report as data weren’t collected and the same applies for the household survey regarding the unemployment rate, but October nonfarm payrolls data can be published. After a period of relative calm, in the absence of key US economic data, market conditions could become more volatile as the backlog of data are released.

US equities show a decent fall, likely a combination of fear of what the economic data will reveal and ongoing angst about valuations in the tech sector.  The S&P500 is down 1.2% in early afternoon trading, led by a 2.2% fall in the IT sector, with the Magnificent Seven index down 2.7%.

Weaker equities also reflect a paring of Fed easing expectations, with the Fed now seen slightly more likely than not to keep interest rates steady in December, with only 12bps priced.  Yesterday, Boston Fed President Collins, a voter for the December meeting, said she favoured keeping interest rates steady “for some time to balance the inflation and employment risks in this highly uncertain environment”. Only non-voting FOMC members spoke overnight. San Francisco Fed President Daly said she had an open mind on December. At the more hawkish end, Minneapolis Fed President Kashkari said “we have inflation that is still too high, running at about 3%” and Cleveland Fed President Hammack referred to persistent inflation, and she doesn’t back any more interest rate cuts unless the economy changes.

US Treasury yields show only a small lift across the curve in the order of 1-2bps.  The 10-year rate has traded a range of 4.07-4.115% overnight and is currently 4.09%, up a touch from the NZ close.

UK GDP rose by just 0.1% q/q in Q3, one-tenth weaker than consensus.  Base effects (a strong end to Q2) supported the figure, with the monthly profile particularly weak over the three months during September.  This puts the economy on a weak footing ahead of the Budget later this month, which is unlikely to provide any economic support, with expected spending increases to be met with more than offsetting tax increases to contain the deficit. Market reaction was muted, with little change in BoE policy expectations, with a 21bps cut priced for December.  A dip in GBP was only temporary as US forces took over.

On that note, the USD is broadly weaker despite the market losing faith in easier Fed policy and the backdrop of weaker equity markets.  The EUR and GBP are up 0.5-0.6% overnight.  The NZD has pushed up to 0.5670.  The NZD is weaker against EUR and GBP, falling to 0.4870 and 0.4295 respectively.

Interestingly, the AUD is the weakest major overnight, paring gains seen in the wake of the stronger than expected Australian labour market report yesterday. Employment rose 40k in October, and the unemployment rate fell two-tenths to 4.3%. With the data following recent strength in inflation and more hawkish RBA commentary, the report looked to be fatal for those expecting another possible RBA rate cut this cycle and by the close only a modest chance of any further easing into next year was priced.

Australian rates shot up following the report and some of this has been pared back overnight, contributing to AUD weakness.  After reaching as high as 0,6580, the AUD is currently 0.6550.  NZD/AUD fell to a fresh 12-year low around 0.8595 and has since fully recovered its pre labour market report level of 0.8660.

Higher Australian rates were a key driver of the NZ rates market, resulting in NZGBs closing the day up 6-8bps across the curve, with only a 2bps lift at the very short end.  With Australian rates higher leading up to the weekly bond tender, traders found it difficult to work out fair value heading into the event and, while demand was solid, ranges for accepted bids were wider than usual.  In the swap market, the 2-year rate closed the day up 4bps to 2.58% and the 10-year rate closed up 8bps to 3.73%.  Against the backdrop of higher US and European rates overnight, the Australian 10-year bond future is little changed while the 3-year rate is down 4bps in yield terms.

On the calendar today, NZ’s PMI will be released, where we’ll be interested if there are further signs of green shoots in the economy.  China monthly activity data for October are expected to show retail sales and investment continuing to drag the chain.

Jason Wong is the Senior Markets Strategist at BNZ Markets.