Equities signal risk-on but bonds don't play by the same script. EU surplus with US grows. NZ rates play catchup with USTs with NZG 10yr yield rising

By Jason Wong

A soft USD theme continues to prevail although after falling through much of yesterday it’s trying to recover. 

The US 10-year Treasury yield pushed on up to a fresh high, but has peeled off 5 bps since, while US equities continue to recover.

The S&P500 is on track to rise for the fifth daily consecutive gain, currently up 0.5% and recovering about half of its recent meltdown.  The VIX index has spent most of the day trading below 20, something it hasn’t done in over a week.

However, the risk-on message hasn’t got through to the bond and currency market.  The US 10-year Treasury yield continued to power on up yesterday to reach a fresh four-year high of 2.94%, but there has been a notable retracement, and the yield is back down to 2.88%, down 3 bps from the NZ close.  A flattening bias has been evident, with the 2-yr rate up a touch.

There have been a number of US economic releases overnight, but none were market-moving.  Continuing on from yesterday’s theme of higher inflation and a weaker economy, the hard data showed PPI inflation was higher than expected, while industrial production data were softer.  Confidence data showed a stronger Philly Fed survey, while builders remained optimistic in the NAHB survey. 

Of note, Eurostat reported that the EU’s trade surplus with the US rose by 7% to $160bn in 2017 despite the stronger euro.  At face value this confirmed the view that in a medium-long term context EUR was still a cheap currency despite its recent strong appreciation, while data like this might also get the attention of President Trump and his penchant for imposing trade barriers.

NZ rates played catch-up to the previous day’s USTs selloff, seeing the NZ 10-year government rate up 6bps to 3.0%, a level it hasn’t closed at since late-October.  This saw the NZ -US 10-year spread close at 8.5 bps and it seems just a matter of time before the spread goes negative, as NZ-US short end spreads already have.

In the day ahead we’ll be interested in whether the NZ manufacturing PMI recovers from its swoon in December.  RBA Governor Lowe gives testimony to a Parliamentary committee.  Tonight sees US housing market and consumer sentiment data, none of which are expected to be market moving.

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