Markets have traded with a more cautious tone to start the new week, with equity markets lower and the USD stronger. Oil prices have fallen on concerns around Chinese growth, as some cities reimpose Covid restrictions, and reports, since denied by Saudi Arabia, that OPEC+ will consider a production increase. Global rates are slightly lower overnight and yield curves are again flatter, the US 2y10y curve pushing down to fresh 40-year lows of -73bps. The NZD has fallen back below 0.61 amidst a broadly stronger USD and weaker commodity prices.
China growth concerns have come back on the market’s radar, with Covid cases continuing to rise and several cities imposing new restrictions. In Shijiazhuang, a city of around 11 million a few hours from Beijing, the local authorities issued “in principle” stay-at-home guidance to residents after a renewed surge in cases. In Guangzhou, while there is no city-wide lockdown, the authorities have locked down Baiyun, its most populous district, for 5 days. Schools in several districts of Beijing have switched to online learning this week as Covid cases rise. While the government recently issued guidance to local authorities on how to control the spread of Covid with less collateral damage for the economy, the sharp increase in cases in several cities is already putting the less heavy-handed approach to the test. Markets have been buoyed in recent weeks by the apparent shift in direction in Covid policy by China, with some speculating the end game is the likely end to the zero-Covid policy at some point next year. The increase in cases and new restrictions is a reminder it won’t be a smooth transition.
After their heavy falls last week (-10% on WTI crude), oil prices are lower again overnight. The WSJ reported that OPEC would consider a supply increase of up to 500,000 barrels per day at its upcoming December meeting, partly to counteract a possible reduction to Russian supply as the EU’s Russian oil embargo and G7 oil price cap for Russian oil come into force. WTI crude plunged as much as 6.5% overnight amidst the WSJ report and concerns around the China growth outlook, reaching its lowest level since January, at almost $75 per barrel. But there has been a sharp recovery over the last few hours, with WTI crude now only 0.7% lower on the day, after Saudi Arabia denied the WSJ report, adding it was prepared to further reduce production if required to balance the oil market.
Equity markets have started the week off on a softer note amidst the renewed worries about the Chinese growth outlook. The S&P500 is down 0.4%, weighed down by a 1.3% fall in the Energy sector, while the NASDAQ is 1.2% lower. The Hang Seng was 1.8% lower yesterday, reversing some of its powerful 25% rally since the end of October.
US Treasury yields are little changed to start the week, with the 10-year rate continuing to hover just above 3.80%. The German 10-year rate is 2bps lower, just below the 2% mark. The yield curve flattening trend remains in force, with the US 2y10y yield curve making fresh multi-decade lows of -75bps overnight (currently -73bps). The deeply inverted yield curve reflects the market’s view the Fed will stick to its guns with tightening (which is keeping short-term rates elevated), eventually leading to recession and ultimately a pivot towards rate cuts from later next year (which is weighing down on long-term rates). The German curve is also inverted, albeit substantially less so than the US, at -11bps, warning of an upcoming recession in the region.
The USD is broadly stronger so far this week amidst a backdrop of more cautious risk appetite. The BBDXY index is up 0.8%, reversing some of its sharp losses over recent weeks which were fuelled by the lower US CPI data and some renewed optimism around Chinese growth. USD/CNY was 0.6% higher yesterday, taking it back above 7.16. Of the majors, EUR is down almost 1%, to around 1.0240, while the JPY has underperformed, down 1.2%.
The weaker CNY and lower commodity prices have added downward pressure to the AUD and NZD. The AUD is down 1.1% overnight, to just below 0.66, while the NZD has drifted back below 0.61 this morning, 0.8% lower on the day. The NZD/AUD cross continues to push higher, now trading at its highest level since early April, at 0.9240.
NZ rates were higher yesterday as the market awaits the RBNZ’s MPS tomorrow. The 2-year swap rate was up 6bps, with pricing for the MPS tomorrow shifting up to 4.18%, implying a roughly 70% chance of a 75bps hike. Like global curves, the NZ curve remains under flattening pressure, the 2y10y swap curve reaching -58bps, its most inverted level since 2008, when the OCR was still 8.25%.
RBA Governor Lowe is speaking this evening on “Price Stability, the Supply Side and Prosperity”. Given the recent strong readings on both wage growth and the unemployment rate (3.4%), our NAB colleagues expect Lowe to suggest a pause is not on the table in the near term. Cleveland Fed President Mester is speaking tonight, although we have already heard from her a few times over the past two weeks.
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