Lots of news yesterday with a more dovish than expected Fed statement, a solid NZ GDP report, and a lower AU unemployment rate causing market movements.
Overnight, the afterglow of yesterday’s more-dovish-than-expected Fed statement was evident. US equity markets have lifted, while bond yields have consolidated yesterday’s drop after testing even lower levels. USD/JPY has stabilised around 110.80, although, more generally, the US dollar has recovered with major indices back to where they were pre-Fed, helped by negative Brexit news.
As UK PM May pitched her delay plan to the EU, leaders there indicated that was only likely if the UK Parliament ratified the deal. On that front, the DUP’s Wilson said ‘we are no closer to backing Brexit deal’. The EU’s Junker said if no approval is gained then he needs another meeting with May next week. The chance of a no deal has increased. All pretty ugly and the GBP reacted accordingly. GBP plunged two big figures toward 1.3000 overnight before recovering slightly. Stronger than expected UK retail sales had little impact. GBP opens this morning around 1.3050. More volatility seems assured.
As widely expected, the Bank of England kept rates on hold at 0.75% and asset purchases unchanged. No news in this, although the Bank did note the effect of Brexit uncertainty on investment has increased. The BoE noted around two-thirds of firms it surveyed had started implementing contingencies for a disorderly Brexit.
GBP weakness weighed on EUR. After ripping higher towards 1.1450 yesterday on the back of the dovish Fed, EUR has given up all the gains to return to a familiar 1.1350 level.
Elsewhere in Europe, and to counter the theme of many global central banks sounding more cautious, Norges Bank raised rates 0.25% overnight to 1.00% as expected. The Bank indicated another lift is likely over coming six months. This caused some volatility in NOK.
Yesterday, the NZD pushed above 0.6900 following the Fed, received another leg higher following solid NZ GDP, with more support coming from a lower AU unemployment rate. NZ Q4 GDP growth came in at 0.6%. While this matched polled market expectations, we detected many feared a lower number with the positive market reaction ultimately suggesting this was so. The NZD probed higher despite annual growth of 2.3% missing polled expectations of 2.5% and coming in under RBNZ expectations of 2.7%. But after testing year-to-date highs around 0.6940 yesterday, the stronger USD overnight sees the NZD back at very familiar levels this morning around 0.6870. Range trading continues. NZD/GBP hit month-to-date highs on GBP weakness overnight, currently sitting around 0.5260, up 0.9% from this time yesterday.
NZD/AUD gyrated with the data yesterday. Up through 0.9700 on NZ GDP then back down again on a solid AU jobs report. AU employment actually undershot expectations but a dip in the unemployment rate to 4.9% from 5.0% saw the AUD punch up through 0.7160 and the NZD/AUD give back its NZ GDP gains. Overnight, AUD is back to 0.7100 while NZD/AUD has consolidated around 0.9670.
US Treasury yields fell post yesterday’s Fed statement and consolidated the move overnight. The US 10 year yield did try and press lower as yields in Europe fell, dipping just under 2.50% at one point. But it has since recovered to sit around 2.54% currently, nearly up a point on the day.
The Fed’s more-dovish-than-expected statement is clearly supportive of Treasuries. However, we see them struggling to rally too much further from current levels in the absence of weaker data. We see the 10 year note towards the bottom of a 2.40% to 2.90% range.
NZ rates saw some volatility yesterday following the Fed and NZ and AU data. By the close, NZ government bonds had rallied across the curve, with a flattening bias, as post-Fed offshore moves exerted weight especially on long end. NZGB 10 year rates closed at 2.00%, down 5bps on the day.
Long end swap rates also eased on the day, while short end rates bucked the trend supported by the GDP data. This makes sense to us. Sure, some may see slowing annual growth signalling the RBNZ should be rushing to lower interest rates. But it is important to recognise that the Bank does not target growth per se. It targets maximum sustainable employment and CPI inflation. Only if slower growth foretell lower inflation or a slack labour market would a cut be warranted. To date, there is no evidence that this will be the case. Through all the news, 2 year swap rates closed little changed at 1.815% on the day. It is shaping up to be a quieter day today with little data scheduled during the local session.
Overnight, numerous PMI indicators are due in the US and Europe. These will receive some focus as markets assess the latest growth pulse in the respective regions.
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