Global rates fell overnight after a much weaker than expected US retail sales; NZD has outperformed amidst further short-covering in the wake of Wednesday’s RBNZ MPS while NZ swap rates rose again yesterday; S&P500 is close to flat on the day

By Nick Smyth

Global rates fell overnight after a much weaker than expected US retail sales release raised concern about the extent of slowing in the US economy.  The retail sales release also hit equity markets, which had initially been supported by reports that the US was considering a 60 day extension to the trade war ceasefire.  The S&P500 has recovered to be flat on the day however.  The NZD has outperformed amidst further short-covering in the wake of Wednesday’s RBNZ MPS while NZ swap rates rose again yesterday. 

The main news overnight has been a shocking US retail sales release for December (its release delayed due to the government shutdown).  US retail sales fell more than 1% in December, well below market expectations, while the ‘control group’ measure, part of which feeds into GDP, fell almost 2% on the month.  As a result, the Atlanta Fed’s GDPNow estimate for Q4 US GDP has been trimmed from 2.7% to 1.5%.  The retail sales data points to the risk that the US economy might be slowing faster than commonly expected, although some analysts have pointed out that the data look excessively weak compared to other economic indicators and noted that the December data followed two strong months of spending. 

US Treasury yields moved sharply lower after the retail sales release, with the 10 year rate falling from 2.7% to 2.64%, although it has since bounced back to 2.66%.  Influential Fed Governor Brainard commented that the release had “certainly caught my eye”.  Brainard noted that “it’s one month of data, so I don’t want to take too much signal from it. It certainly adds to a story where we want to take on board that there are some downside risks.”  Fed rate expectations fell, with the market pricing-out the few basis points of Fed tightening for 2019 and building in greater chance of rate cuts for 2020 (around a 2/3 chance of a rate cut is now priced by mid-2020).  Elsewhere on the data front, weekly jobless claims were higher than expected, with the four week moving average moving up to 232k.  Jobless claims appear to be trending gradually higher, indicative of some slight softening in the US labour market, although they remain at very low levels on a historic basis. 

Global markets had earlier been boosted by reports yesterday that the US was considering a 60 day extension to the March 1st deadline for higher tariffs on Chinese imports.  An extension to the deadline date would allow Presidents Trump and Xi to meet face-to-face to finalise any potential deal.  US trade representative Robert Lighthizer met with Chinese vice-premier Liu yesterday as trade talks continue.  According to reports, the Chinese hope to satisfy US demands with promises to buy more semiconductors and other US goods while the two sides remain after apart on the deeper structural issues, such as Chinese government subsidies and industrial policies.  

The S&P500 is close to flat on the day, having fluctuated between gains and losses.  S&P500 futures had risen 0.4% on the reports of an extension to the trade war ceasefire, but the retail sales data saw an immediate 1% move lower, led by consumer discretionary stocks.  There has been a steady recovery in US equities over the past few hours however, with the S&P500 and the consumer discretionary sub-index close to unchanged on the day now, suggesting the market may doubt the reliability of the retail sales data.  Fed Governor Brainard assisted the market recovery by suggesting that the Fed should complete its balance sheet reduction (so-called “quantitative tightening”) this year, in her opinion. 

In currencies, the USD is down marginally on the day, although the USD indices continue to hover around year-to-date highs.   The EUR has moved 0.3% higher to just below 1.13.  Eurozone GDP met expectations at 1.2% year-on-year, its slowest rate of growth since early 2014, while German GDP was flat in Q4, meaning the economy avoided a technical recession.  The GBP is the weakest G10 currency on the day, down 0.3% to 1.28.  Besides the ongoing Brexit uncertainty (with the UK parliament voting against the government on a motion to support Theresa May’s approach to leaving the EU), dovish comments by BoE MPC member Vlieghe contributed to the fall in the GBP.  Vlieghe said he thought the appropriate response to a no-deal scenario would likely be for either a rate cut or an extended pause, and even in the event a deal can be reached, signs of slowing in the global economy and weakness in UK domestic data meant that the Bank could “probably wait to see evidence of growth stabilizing and inflation pressure rising before considering the next hike in bank rate.”

The NZD is the top performing currency over the past 24 hours, amidst short covering from investors, and is 0.7% higher to 0.6840.  The NZD has pushed back towards the highs reached shortly after the RBNZ MPS earlier this week, while the NZD/AUD has moved up to 0.9630, its highest level since mid-2017.  Market participants continue to recalibrate their RBNZ expectations after the MPS, and NZ swap rates moved another 2 to 4bps higher across the curve yesterday, led by the 5 year point. 

RBNZ Governor Orr and Finance Minister Robertson officially unveiled the new RBNZ remit yesterday, which is essentially unchanged from the current Policy Targets Agreement.  Of potentially more interest, Stats NZ released its new monthly data on rents, which be used to calculate the rental component of CPI from Q2 onwards.  Our initial estimates suggest the new rent data could add between 0.06% and 0.1% to annual headline CPI and between 0.11% and 0.2% to non-tradables compared to the current method.  There was no obvious market reaction to the Stats NZ announcement and, counterintuitively, NZ inflation-indexed bonds underperformed nominal bonds yesterday.  But at face value, the change should give a modest boost to NZ inflation, and especially non-tradables, going forward.


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