Little pulse across global equities and bond markets; currency markets have showed little movement overnight, while the NZD remains at the bottom of the pack after yesterday’s downside miss to the CPI

Market trading remains subdued ahead of the Easter holidays, with little pulse across global equities and bond markets.  Currency markets have showed little movement overnight, while the NZD remains at the bottom of the pack after yesterday’s downside miss to the CPI.

Markets continue to be in holiday-mode this week. Despite being in the midst of a US earnings season, reports seem to be only having stock-specific moves, with little influence overall for the key indices.  The S&P500 is currently down 0.3% and has been largely tracking sideways this week in a narrow range.

Data overnight didn’t have much market impact. The US trade deficit was lower than expected in February, which will add to Q1 GDP growth estimates.  The Atlanta Fed’s GDPNow estimate nudged up to 2.4%. Germany’s government downgraded GDP forecasts, halving it to 0.5% for this year.  A year ago the forecast for 2019 was 2.1%.  Growth next year is projected to recover to 1.5%.  UK core CPI was slightly weaker than expected, but until Brexit uncertainty is resolved, the market is unresponsive to the flow of data.  Canadian core CPI inflation was in line.

This morning the WSJ reported that the US and China have tentatively scheduled a fresh round of face-to-face meetings as they seek to close out a trade deal, with negotiators aiming for a signing ceremony in late May or early June.  On a normal day this might have triggered some sort of market response, but with markets asleep, there was little response.

The US 10-year rate is trading unchanged at 2.59%, meeting some resistance to push higher after hitting 2.61% overnight.

The NZD sits this morning at 0.6720, trading a tight range overnight and only down a touch since the NZ close.  Most of the action happened during the local trading session after NZ CPI data came in slightly weaker than RBNZ expectations, with the market positioned for a miss to the upside. So NZ Q1 CPI was 0.2% lower than market expectations but was just 0.1% weaker than the RBNZ’s projections published in February.  Annual non-tradeables inflation was 2.8% y/y, in line with the RBNZ’s forecast.  The RBNZ’s estimate of core inflation based on the sectoral factor model was unchanged at 1.7%, a level it has now been for four consecutive quarters.  The average of four core measures published by Statistics NZ that we monitor fell from 1.9% to 1.8%.

Market reaction was significant considering the small “miss” on the headline measure, but the market put some weight on the lack of upward pulse to the core measures of inflation. Over the last couple of weeks the market was losing faith in prospects for a May easing, but the lack of inflationary pulse removed one hurdle in the way for a rate cut.  By the end of the day the probability of a rate cut as soon as next month was priced at just over 50%. Around 1½ rate cuts are priced by year-end. Increased conviction of rate cuts ahead spilled over into the whole curve, with swap rates down 4-6bps.

Intra-day moves in rates were greater, but were faded after stronger than expected China activity data, with industrial production coming in particularly strong. The data add to the “green shots” evident in PMI and credit data and provide support to the view that global economic momentum is at an inflexion point, seeing some positive signs following more than a year of disappointing data.

China’s positive data news coincided with news that the NZ government won’t be proceeding with a capital gains tax, deciding that it was much of a hot political potato. The threat of a capital gains tax, including one that might have captured small and large businesses, has been one factor dragging down business confidence.  The removal of this policy from the agenda should spark some recovery in business confidence.

As the RBNZ considers its next policy move, it will be weighing up the tentative evidence of green shoots on global growth momentum and the likelihood of business confidence recovering, against the backdrop of its preferred measure of core inflation being below the 2% mark for over nine years now, even in an economy facing significant capacity constraints.

In illiquid market conditions, yesterday the NZD slumped by a cent to a low of 0.6668 before settling back above 0.67, and then getting a little boost from the positive Chinese data.  Stepping back from the noise, the 0.6% fall in the NZD over the past 24 hours is notable, but not material, and it remains well within the tight trading range that has been in place since November.

The AUD got a boost after the Chinese data, which saw it push above 0.72, but the move has since faded and it is flat for the day at 0.7170.  NZD/AUD got down to almost as low as 0.9320, but it has since settled around 0.9370.  Today’s Australian employment report will be closely watched as labour market data form a key part of the RBA’s reaction function – the Bank noted that it would likely cut rates if the trend in the unemployment rate heads higher.   And next week’s Australian CPI figure will also be important.  Shifting expectations on timing and scale of possible RBNZ and RBA rate cuts over coming months and quarters will remain a source of volatility on the NZD/AUD cross.

Currency movements for the other majors have been insignificant, while the underperformance of the NZD post-CPI sees the NZD crosses all slightly weaker for the day.

The economic calendar is heavy approaching the Easter holidays.  In addition to the Australian employment report, euro-area PMI data will be important, particularly since Germany’s manufacturing PMI has been lurching down at a rapid rate. The market is hopeful that April represents a positive turning point.  In the US, retail sales data are the key focus.

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