US equities and bond yields have moved modestly higher; currency market moves have been reasonably subdued, although the GBP has strengthened slightly; NZD has consolidated

By Nick Smyth

US equities and bond yields have moved modestly higher over the past 24 hours as recession fears have eased somewhat.  The moves came despite weaker than expected US consumer confidence and housing data.  Currency market moves have been reasonably subdued, although the GBP has strengthened slightly after key Brexiteer Jacob Rees-Mogg signalled he might support Theresa May’s deal.  The NZD is unchanged overnight, ahead of the RBNZ’s OCR Review this afternoon. 

Market sentiment has improved overnight, with US equity markets bouncing back after their large falls on Friday.  The S&P500 rose as much as 1.1% in early US trading, before paring that gain to 0.4% as we write.   Sentiment remains cautious however, given signs of slowing in global growth and falling corporate earnings expectations (the consensus is for S&P500 earnings to fall 1.7% in Q1). 

US bond yields have recovered modestly amidst the improvement in risk appetite.  After yesterday’s Report was sent, the 10 year Treasury yield fell to 2.375%, its lowest level since January last year, on what appeared to be stop-loss buying from investors.  The 10 year Treasury yield has since recovered to 2.42%, while the 2 year yield has increased 2bps to 2.26%.  The market fully-prices a Fed rate cut by year-end and a second rate cut by September 2020. 

In contrast to the improvement in market sentiment, US economic data released overnight was disappointing.  The Conference Board measure of consumer confidence dropped sharply, while the survey’s labour market differential (which measures the difference between those reporting jobs are “plentiful” versus those saying jobs are “hard to get”) dropped from +34 to +28.3, indicative of some softening in the labour market.  We would note however that the Conference Board confidence measure remains at a historically elevated level and the University of Michigan’s confidence survey showed a strong rise earlier this month.  Meanwhile, US housing starts dropped sharply (from an upwardly revised level in January) while the less volatile building permits data was slightly weaker than expected.  The data reinforce the view that the US economy has lost some momentum from last year.  The Atlanta Fed GDPNow estimate for Q1 currently sits at 1.3%. 

In Fed-speak, Boston Fed President Rosengren acknowledged that Q1 GDP growth was likely to be “pretty weak” but said growth over the remainder of the year should be closer to 2%-2.5%.  Rosengren said the Fed pausing its tightening cycle at this stage was “the responsible thing to do”, citing uncertainty around the Chinese and European growth.  While his central view was that the Fed will probably need to raise rates again, he added that it was possible the next move by the Fed could be a rate cut, if the US and global economies weaken by more than expected. 

FX market moves over recent days have been subdued, despite the volatility seen in rates and equity markets.  The USD indices are 0.1% to 0.2% stronger on the day, but remain firmly contained within their broader trading ranges.  The Japanese yen has underperformed overnight, with USD/JPY up 0.5% to 110.50, amidst the improvement in risk appetite.   The EUR is 0.2% lower, with ECB Governing Council member Olli Rehn noting that the slow-down in the European economy appeared to be more durable in nature, and not the temporary slow-down some were predicting late last year. 

The GBP is up slightly against the USD over the past 24 hours, on some positive Brexit news.  Yesterday morning, parliament voted by 329 to 302 to hold a series of so-called "indicative votes" on Brexit options (on Wednesday) to try to break the Brexit impasse. Votes will be non-binding on the government, but the hope is that it will reveal an option that can command a majority in the parliament.  Overnight, arch-Brexiteer Jacob Rees Mogg said the choice appeared to be between May’s deal or not leaving at all, suggesting some Brexiteers are moving in favour of supporting May, if she puts her deal to vote again.  The GBP moved to a high of 1.3260 after the Rees-Mogg comments, although it has since retraced to around 1.3220 after the DUP (whose 10 votes will be crucial) said it wouldn’t back the deal.  We think the main threat to the GBP at present is the risk of an early election, rather than a no-deal scenario. 

The NZD has consolidated its gains from Monday night, and sits at 0.6915, unchanged on the day.  Meanwhile, the NZD/AUD cross has drifted lower over the past 24 hours to 0.9680, with RBA Assistant Governor Ellis’s speech suggesting that the RBA remains in wait-and-see mode and highlighting the improvement in the Australian labour market. 

In the domestic rates market, the NZ curve flattened again yesterday, with some profit-taking at the short-end driving a 2bp increase in the 2 year swap rate to 1.8%, while the 10 year swap fell another 2bps to 2.185%.  The 2s10s swap curve is the flattest it has been since mid-2016, at just 40bps. 

The focus turns to the RBNZ OCR Review this afternoon, at 2pm.  We’re expecting the Bank to acknowledge some of the recent weakness in global data, but to retain its message that the OCR is likely to be on hold through 2019 and 2020 and that the next move could be up or down. 

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