US equities and bond yields are slightly higher overnight, although markets remain cautious. Likewise, most currencies are little changed, with the exception of the GBP, which has remained under pressure ahead of a vote on a modified version of Theresa May’s deal tonight. The NZD is hovering just below 0.68. RBNZ Governor Orr speaks at 9am this morning, and he is likely to be quizzed on the Bank’s decision to move to an easing bias at its OCR Review.
After dipping during the Asian session yesterday, US rates have recovered overnight. The 10 year Treasury yield is 1bp higher at 2.38%, having traded as low as 2.34% yesterday (the lowest level since the end of 2017). US equity markets have managed small gains; the S&P500 is up 0.2% on the day while the NASDAQ is up 0.3%. Broader market sentiment remains reasonably cautious however, given the backdrop of slowing global activity indicators.
A speech by influential Fed Vice Chair Clarida highlighted that the US was more exposed to shocks from abroad than it has been in the past and, as such, the Fed was conscious of downside risks stemming from Brexit, a deeper downturn in the global economy and trade tensions. In a dovish nod, Clarida noted that policy adjustments by the Fed had helped cushion the impact on the US economy from previous global shocks, including the European sovereign crisis and the Chinese capital flight episode in 2015/16, with the inference being that the Fed might be willing to cut rates if these global risks were realized. There was little reaction to the speech however, with the market already pricing two full rate cuts from the Fed by the middle of 2020.
In economic data, Q4 US GDP was revised lower to 2.2%, slightly below expectations, while jobless claims were lower than expected. The four week moving average of jobless claims (the data can be volatile week-to-week) moved down to its lowest level since November, and not far from the lows reached last year, indicative of a still-strong labour market (and certainly no sign of an impending recession). In Europe, business confidence fell to its lowest levels since 2016, led by the manufacturing sector, while German CPI was lower than expected.
On the trade front, White House economic advisor Larry Kudlow noted in a speech that an agreement with China “was not time-dependent”, raising the prospect that it could be some time before the two sides can iron out their differences. Kudlow added that “if it takes a few more weeks, or if it takes months, so be it.” US Treasury Secretary Mnuchin and US Trade Representative Lighthizer will have trade talks in Beijing today and then next week Chinese Vice Premier Liu will travel to Washington, which his schedule to include a meeting with Trump.
The USD has strengthened overnight, although individual currency moves (with the exception of the GBP) have been relatively modest. The USD indices are 0.3% to 0.4% stronger on the day, and have moved towards the upper-end of their recent trading ranges.
The major mover in G10 currencies has been the GBP, which has fallen almost 1% over the past 24 hours to 1.3070. The DUP said yesterday that they could not vote for (or abstain from) PM May’s Brexit deal, a modified form of which will be presented to parliament tonight. May’s deal now looks highly likely to fail again, meaning the parliament will need to agree on a longer extension with the EU before April 12th, or leave with no-deal. Parliament meanwhile had its indicative votes yesterday on a way forward. There was no majority for any of the eight options, although a Customs Union solution lost by only 6 votes and Second Referendum lost by only 27 votes. On Monday, parliament will rank the options.
The NZD has traded a tight 0.6780-0.6825 trading range overnight, and is currently sitting at 0.6790. In the domestic rates market, rates opened lower again yesterday, following on from the sharp moves after the RBNZ OCR review, but recovered somewhat over the course of the session, with some profit-taking evident. The 2 year swap closed 2bps lower at 1.62%. The market prices 1½ rate cuts by the end of the year, with a 40% chance of a cut seen for the May meeting.
The ANZ business survey released yesterday was soft, and revealed further weakening in activity indicators and below-average hiring and investment intentions. The survey was the first since the final report and recommendations of the government’s Tax Working Group, which proposed a capital gains tax, so it was no surprise to see confidence fall. That said, the activity indicators point towards annual GDP growth struggling to meet 2%, rather than the 2.5% we forecast, and certainly plays to the RBNZ’s comments from the OCR Review that domestic economy had lost some momentum.
RBNZ Governor Orr speaks this morning at 9am on the RBNZ’s new monetary policy framework, which will include the formation of a seven member Monetary Policy Committee (MPC). The speech takes on added importance in the context of the RBNZ’s surprise move to an easing bias on Wednesday, and the Governor may be asked about whether he agrees with the market reaction in the Q&A (if he does, it will reinforce expectations that the RBNZ is likely to cut rates over the coming meetings, barring an improvement in NZ and global data).
The RBNZ MPC members were announced yesterday, and will include Governor Orr, Deputy Governor Bascand, Assistant Governor Christian Hawkesby, and RBNZ economist Yuong Ha (the latter for a term of one year, while the Chief Economist role is vacant). The external members will be Professors Caroline Saunders and Bob Buckle and economic consultant Peter Harris, a former trade union economist.
Finally, Housing New Zealand priced a $500m 7.5 year sustainability bond yesterday, the first such bond in the New Zealand market. The issue was also the largest ESG bond to have been issued in the NZ market.
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