There hasn’t been any particular theme to market moves over the past 24 hours. Equity markets have softened modestly while US and global rates have, in contrast, moved higher. GBP continues to outperform as the probability of a no-deal Brexit scenario recedes while the NZD and AUD have fallen. Fed Chair Powell’s testimony to the House has not been market-moving.
There has been a confusing combination of market movements overnight. US equities are down modestly (S&P500 and NASDAQ both -0.2%), with the military standoff between India and Pakistan cited as one reason behind the falls. Most sectors of the S&P500 are lower on the day, with one exception being the energy sector, which has benefited from a 1.5% rise in Brent crude oil after a surprise drawdown in US crude oil inventories.
On the trade front, US Trade Representative Lighthizer told Congress that any trade deal with China would need to include “significant structural changes” around areas such as the protection of intellectual property rights and alleged forced technology transfers.
In contrast to the moves in equities, global rates have moved higher. The US 10 year Treasury yield is 4bps higher on the day, to 2.68%, although it remains stuck within a tight trading range. The move in US rates tracked similar moves in Europe, with 10 year German bund yields 3bps higher and 10 year UK gilts 7bps higher (as the market factors in a less pessimistic view of Brexit).
In economic data, US pending home sales were much stronger than expected, likely boosted by the recent decline in US mortgage rates. The US trade deficit was much larger than expected while factory orders were also weaker – there was little net effect on the Atlanta Fed’s GDPNow estimate for Q4 GDP, which is released tonight. The Bloomberg consensus is for a 2.3% increase in Q4 GDP (annualized), which is above the GDPNow reading of 1.8%.
Having delivered his semi-annual testimony to the Senate yesterday, there was, unsurprisingly, little new information from Fed Chair Powell’s testimony to Congress overnight. Powell said the Fed was close to agreeing a plan on its balance sheet (which is shrinking, as the Fed lets is QE holdings mature). The consensus is for the Fed to halt its balance sheet reduction later this year.
The standout performer in FX markets is again the GBP, following on from Theresa May’s decision to allow the UK parliament the option of extending Article 50. The GBP is 0.4% higher to 1.33, its highest level since July. The UK parliament will vote on a number of Brexit-related amendments later today, although with May having pre-empted parliament’s desire for a Brexit extension, there should be little market impact.
The NZD and AUD are the two weakest currencies on the day, both down around 0.7%, on little news. The NZD again tested resistance around 0.69 yesterday afternoon, but it has moved steadily lower since the London market opened to sit at 0.6835 currently. The NZD is close to the middle of our forecast 0.67 – 0.70 range for this year. The NZD/GBP has fallen over 1% to 0.5140, and is at its lowest level since November.
NZ rates were lower across the curve yesterday, outperforming other rates markets. The 2 year swap was 2bps lower to 1.84%, leaving it 5bps below the 90 day bank bill rate. The 10 year swap rate fell 3bps to 2.41%, and it is now approaching the lows reached before the RBNZ MPS earlier this month. The decline in NZ rates since the MPS doesn’t make much sense to us, given the recovery in global markets since then, and we should see a bounce today following movements offshore.
The ANZ business survey is released today, which will give us a feel for NZ business momentum in 2019. In Australia, the quarterly capex survey is released, with our NAB colleagues looking for modest growth of 0.5% for the quarter (market +1%). Elsewhere, the Chinese PMIs are released along with US Q4 GDP, while Fed Vice Chair Clarida will be speaking.
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