Stronger US ISM data have driven a significant sell-off in US Treasuries, but that hasn’t perturbed equity markets, which show decent gains; NZD is little changed from last week’s close, while GBP is recovering as a super-soft Brexit comes into play

By Jason Wong

Stronger US ISM data have driven a significant sell-off in US Treasuries, but that hasn’t perturbed equity markets, which show decent gains.  The NZD is little changed from last week’s close, while GBP is recovering as a super-soft Brexit comes into play.

Global growth fears are receding.  An unexpected recovery in China PMI data released Sunday was backed up by a recovery in the Caixin version of the PMI.  In overnight news, the US manufacturing ISM was better than expected, driven by the employment and new orders components.  US February retail sales data disappointed but this was more than offset by positive revisions to January data. Stronger US construction data (and with large positive revisions) were also released.  The stronger US data saw the Atlanta Fed’s GDPNow estimate upgraded from 1.7 to 2.1% for Q1.

So here’s the way the market is working at the moment.  In March we saw global growth fears intensify, driving global bond rates significantly lower, the latter supporting equity markets.  As April begins global growth fears recede, global bond rates reverse course, but the former supports equity markets.  Just buy equities seems to be the mantra.  After mega returns in Q1, the S&P500 is currently up nearly 1%, while the Euro Stoxx 600 rose by 1.2%.

After the release of the US ISM data, Treasury yields leapt higher and the yield curve steepened, seeing the 2-year rate up 6bps to 2.32% and the 10-year rate up 9bps to 2.49%. With the 3-month rate down 1bp at 2.37% the 3mth-10yr yield gap is now +12bps, safely out of the negative zone that forewarns a recession, which got the market’s attention last month.

Elsewhere, the UK’s manufacturing PMI was much better than expected, but this was driven by stockpiling ahead of Brexit, with stock-building index hitting a record high. In the euro-area, the final reading for Germany’s manufacturing PMI was even lower than the flash estimate, which was awful, confirming the weakest activity levels in about seven years.  Euro area CPI data were also softer than expected, albeit some put this down to distortions from the timing of Easter.

The USD was weakening ahead of the ISM data release, but bounced higher after the positive reading, seeing it flat for the session.  The NZD got off to a positive start for the week following China’s PMI data but met some resistance just under the 0.6840 mark.  The stronger USD post the ISM release has seen it drift down to 0.6810 mark,  close to where it closed last week.  AUD has followed a similar pattern, meeting resistance just over 0.7130 and now 0.7110.  Not surprisingly, JPY is the weakest of the majors in the higher rate environment.  USD/JPY is up 0.5% to 111.40 and NZD/JPY is up 0.5% to 75.9.

EUR got up to 1.1250 before USD strength took it back down to just above 1.12.  GBP has been the strongest of the majors rising 0.7% to 1.3130, a nice recovery after last week’s fall. The UK parliament is currently debating Brexit options and the House of Commons Speaker has selected four options which will be voted on later this morning, all of which would either keep closer ties to the EU than PM May’s plan, or potentially stops Brexit altogether. The front-runner to win support appears to be a “super-soft” Brexit option after the opposition Labour and Scottish National Parties both said they’d order their members of Parliament to back it. The so-called “Common Market 2.0” proposal from Conservative Nick Boles, seeks to keep the UK in the EU and negotiate a comprehensive customs arrangement with the bloc.  We remain optimistic on GBP as a soft Brexit, or a delayed or no-Brexit, appear the most likely outcomes.

The NZ rates market again showed some lift after recently reaching record lows, with gains of 2-3bps across the government and swaps curve.  After the overnight move, this trend should continue.

In the session ahead, NZ’s Quarterly Survey of Business Opinion is expected to show weaker business confidence and activity indicators, as forewarned by recent business surveys, so it ought not to be market-moving. This afternoon, the RBA statement will be closely monitored to see if the Bank capitulates and moves to an easing bias, following the RBNZ. We’re not so sure about that, given it was only recently that Governor Lowe softened his tightening bias to neutral and recent labour market data which the Bank is focused on likely won’t have triggered any change of perspective. If the Bank sticks to its neutral bias, then the market might be disappointed, seeing some modest upward pressure on the AUD.

Tonight’s GDT dairy auction should be another positive one, extending the strong run of upward price momentum towards the 30% mark.

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