Markets are trading with a risk-on tone overnight, with global equities markets up strongly. US retail sales bounced back from weakness in December, but US rates have been largely unmoved. Most currencies are little changed to start the week, although the GBP has recovered ahead of Theresa May’s Brexit vote tonight amidst speculation she might have secured some concessions from the EU.
Equity markets have had a good session overnight, with the S&P500 1.1% higher and the NASDAQ up 1.7%. Both indices have now fully reversed the losses seen after the ECB meeting, in which the central bank presented a gloomy economic outlook. The Dow Jones has lagged the move in the other US benchmarks (+0.5%), with a 6.5% fall in Boeing shares after the plane crash in Ethiopia weighing heavily on the index (the DJIA is a price-weighted index of 30 stocks).
It’s hard to pinpoint a trigger for the reversal in sentiment over the past two days, although a stronger than expected US retail sales release overnight may have been one contributing factor. US core retail sales bounced back strongly in January after a massive fall in December that looked out-of-line with other indicators of US consumer spending (and an economy with a multi-decade low unemployment rate). Downward revisions to prior months’ retail sales took some of the gloss off the January upside surprise, and suggest that Q4 US GDP will be revised modestly lower. The Atlanta Fed GDPNow estimate for Q1 was trimmed to just 0.2% after the retail sales release, from 0.5%, although these early GDP estimates can be revised significantly as new data is received. The trend in retail sales data imply the US economy is slowing from its well above-trend pace last year, but the US consumer remains in reasonably healthy shape.
US rates were little moved by the data, with the 10 year Treasury yield up 1.5bps to 2.64%, still firmly entrenched within its recent narrow trading range. Early yesterday afternoon, Fed Chair Powell’s interview with 60 Minutes was aired and, as expected, he didn’t provide any market-moving insights. Powell highlighted increasing evidence of a slowdown in the global economy and said the Fed was in no hurry to change rates. The market continues to price very little for the Fed this year, with a rate cut almost fully-priced by the end of 2020. The Fed is now in black-out until the March FOMC meeting on the 21st.
The major mover in FX markets has been the GBP, which is over 1% higher from the end of last week. The GBP is trading at 1.3145 as we write, almost 2 cents higher than the levels reached early yesterday morning. There is speculation that Theresa May just may have managed to secure some concessions from the EU, with the BBC reporting a short while ago that senior members of the Brexit-supporting European Research Group of MPs had been summoned to see the Chief Whip (although that doesn’t mean a breakthrough has been secured). And about an hour ago, it was reported that May would fly to Strasbourg for last minute talks with the EU’s Juncker, a possible sign that progress had been made in the negotiations ahead of the vote in parliament tomorrow. Brexiteers have said they will vote against the Government’s deal unless they receive legal assurances that the UK will not be bound to the EU’s rules indefinitely, and May’s deal is set for an almost certain defeat if she cannot secure some concessions from the EU. May will come under heavy pressure to resign if her signature bill is defeated for a third time, with the Telegraph reporting yesterday that only two members of her cabinet still supported her.
The stronger GBP has provided a modest tailwind to other currencies over the past few hours, although movements have been reasonably modest (most currencies +/- 0.4% since the end of last week). The EUR is flat on the day, while the safe haven Japanese yen and Swiss franc are slightly lower amidst the rise in equity markets.
The NZD is up 0.35% to 0.6830, supported by the improvement in risk sentiment. It remains close to the middle of its recent 0.6650-0.6950 trading range. The NZD/AUD has continued to grind higher, and is up to 0.9675. NZ rates closed unchanged yesterday although, of note, the 10 year swap rate touched its all-time low of 2.365% during the session.
US CPI is released tonight, although barring a significant surprise its unlikely to be a major market mover. The NAB Business survey is released across the Tasman.
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