Financial markets had a quiet end to last week, with modest changes in currencies, modest upside to equity markets and some further downside pressure to global rates.
The S&P500 ended up 0.5%, taking its weekly gain to 2.9%, more than making up the previous week’s fall and closing in on the record high set in September. The VIX index slipped below 13, taking it down to its lowest level in five months. Newsflow was light during the session. There were only second-tier data releases in the US, with industrial production and the Empire survey (representing factories in NY) undershooting expectations, while the University of Michigan’s consumer sentiment index was stronger than expected.
US Treasury rates traded with a downside bias, with the 10-year rate ending the session down 4bps to 2.59%, its lowest close since early January. Rates seem to be drifting down ahead of this week’s FOMC policy announcement, where we expect the Fed to note recent weakness in economic data, maintain its line about being patient about further policy adjustments, and with a downgrading of projections to the “dot plot”, with one rate hike, at most, likely factored in for this year. Current Fed Fund futures depict a growing chance of a rate cut, not hike, as the year progresses with some 9bps of easing priced into the curve by the end of the year.
The NZD traded a very tight range Friday night after drifting higher during the local trading session, ending the week just under the 0.6850 mark. The week saw a less than 1-cent trading range and the NZD remains very close to our short-term fair value model estimate. There was no discernible impact on the currency of the shocking terrorist attack in Christchurch, which received significant global media coverage. Our thoughts are with those directly affected by this tragedy.
Other currency movements were also modest on Friday. GBP found further mild support as markets take a more constructive view on the outcome of Brexit, whether it be a soft version or an extended delay. UK PM May’s negotiated Withdrawal Agreement might be presented for a Parliamentary vote on Tuesday in a third and final attempt to win support. The FT reports that May’s allies believe that if the DUP backs the deal, it will convince rebel Tory Eurosceptics to fall into line. A win here would bring the painstaking process towards an end, with the soft Brexit proposal falling into place after a short delay. Chancellor Hammond said that a third vote on May’s proposal will only be presented if they have the numbers to win. GBP ended the week just under 1.33, with NZD/GBP at 0.5150.
As expected, the BoJ kept monetary policy unchanged but admitted some weakness in exports and production. More interestingly, Governor Kuroda defended the Bank’s self-imposed 2% inflation target after earlier the government said it wanted the Bank to take a more flexible view on inflation targeting. Finance Minister Aso said that "For the general public there isn’t a single person out there saying it’s outrageous we haven’t reached 2 percent". But Governor Kuroda said “we think that making [the 2 percent target] a reality is necessary to achieve the BoJ’s mission of price stability”. This suggests that the BoJ is unlikely to deviate from its super-easy policy stance anytime soon despite no hope in reaching the inflation target, never mind the unintended consequences of its policies. JPY ended the week near 111.50, and NZD/JPY at 76.3.
It’s a quiet start to the week, with most of the action (bar the possible Brexit vote) happening from Thursday onwards. Domestically the focus will be on the Q4 GDP report, where modest growth is expected (consensus is at 0.6% q/q). As noted above, the FOMC meets and so does the BoE. Key data releases later in the week are Australian employment, Japan CPI and euro-area PMIs.
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