Volatility in equity markets continues. S&P500 down 2% after late 4% rally from its low yesterday. US 10-year rate shows little net movement

Equity markets remain choppy and, as we go to print, the S&P500 is down about 2%. There has also been a bit of a swing in the US 10-year rate, but with little net change overall. Currency markets show modest movements, and the NZD remains close to where it was this time yesterday, languishing around 0.6675.

It is tempting to delete all references to live market prices in this report, for US equities at least, as in an hour or two into the close they could be completely different. The recent trend has been the US equity market closing at nowhere near the levels noted in our report. Yesterday saw a more than 4% recovery in the S&P500 from its low to its close.

Already today, the hi/lo swing has been in the order of nearly 2%. If this report was your only information you had on US equities, then you might be pleased to note that the S&P500 is currently up about 1½% from this time yesterday. In the current trading session, the index is down about 2%, but by the market close it could be up 2% or down 6% on recent form. The Euro Stoxx 600 index closed 0.7% higher overnight, a lagged reaction to the strong US close yesterday.

The battle between the bulls and the bears continues, with market valuations still stretched on historical measures after a liquidity-fuelled bull market for equities and as we head into a more difficult macro environment, with growth slowing, inflation rising and a growing list of central banks joining the policy tightening cycle. The market awaits the Fed’s latest policy update at 8am NZ time tomorrow morning.

There isn’t much to add to the Russia/Ukraine war preparations we noted yesterday other than the US has put as many as 8500 troops on alert, “ready to go at a moment’s notice”. US officials added that the country is prepared to impose sanctions and export controls on critical sectors of the Russian economy if Russia invades Ukraine.

In economic news, after an estimated bounce-back of 5.9% last year, the IMF lowered its global growth forecast for 2022 to 4.4% (previously 4.9% in October), with notable downward revisions for the US and China. The impact of Omicron hitting Q1 growth, less fiscal stimulus in the US and China’s challenges in the real estate market were all cited. At the same time, the IMF upgraded its inflation forecasts and noted that even with slower growth the Fed would need to tighten policy faster than it previously expected. A spokeswoman said that “the continuing global recovery faces multiple challenges as the pandemic enters its third year”.

US consumer confidence as measured by the Conference Board fell by less than expected, with a lift in current conditions more than offsetting a fall in the expectations component. The “jobs plentiful” versus “jobs hard to get” indicator remained historically high, consistent with a very tight labour market. Germany’s IFO survey of businesses showed rising expectations, consistent with some improvement in activity after the setback to the economy’s recovery through supply bottlenecks and the impact of Omicron.

The US Treasuries curve shows a flattening bias ahead of the expected tightening cycle, with the 2-year rate up 3bps to 1.00% and the 10-year rate down 2bps to 1.75%. The 10-year rate has traded about a 7bps range of 1.725%-1.795%, roughly correlated with the movements in S&P futures, illustrating the sensitivity of the rates market to equities over the past 24 hours.

Currency movements have been modest. The euro has been on the weak side, down 0.2% overnight and 0.4% from this time yesterday to 1.1285. The NZD shows little net movement over the past 24 hours, not being able to sustain the rally back above 0.67 yesterday. A new 14-month low of 0.6660 overnight is 1bp below yesterday’s low indicatively suggesting some support round that level. The NZD currently sits at 0.6675. 

Yesterday, Australian CPI data surprised to the upside yet again, with underlying inflation (trimmed mean) of 1.0% q/q in Q4. Annualising the past six months puts inflation running at 3½%, an understatement considering the accelerating pace of late.  Alongside labour market strength, the data suggest the country is no different to the other dollar-bloc nations (NZ, US and Canada) despite the protestations of the RBA.  The Bank will surely capitulate on its rates outlook where, as recently as December, it suggested that conditions for an increase in the cash rate would not be met in 2022. The market has, for some time, anticipated that the RBA would be forced into a much earlier tightening cycle and this contained the market reaction. The market nudged to price in the first hike by May this year, with over 100bps of tightening through the next year, while the net change in the 3-year bond future since the report has been worth about 4bps upside in yield.

The AUD has traded a tight range after a short-lived minor rally following the CPI report. It sits at 0.7140 and NZD/AUD has been hovering around 0.9350.

The small lift in Australian rates spilled over into the NZ swaps curve, with the 2-year rate ending the day 5bps higher at 2.41%, the 5-year rate up 3bps to 2.77% while the long end of the curve was less affected, barely higher at 2.82%.

On the economic calendar the key event is the Bank of Canada policy update. Economists are evenly divided about whether or not this is the meeting that the rate hike cycle will begin, with a slight majority favouring “no change”. Market pricing favours a hike, with just over a 70% chance of a 25bps hike priced in. BoC decisions can have spillover effects for the AUD and NZD but given so much else is going on at the moment, any spillover this time around should be small.