US equity markets nudge higher again, led by big tech. Global rates drift lower - Powell's Jackson Hole address the main event this week. RBNZ increases bond buying for this week - 10yr swap rate falls to almost 0.5%

US equities pushed higher on Friday, leaving the S&P500 and NASDAQ at all-time highs.  Disappointing European PMIs led to a fall in the EUR and a rise in the USD, while the NZD held its ground, ending the week around 0.6540.  NZ rates continue to fall, with the RBNZ increasing its bond buying pace for this week.

A short while ago, Bloomberg reported that Trump will hold a press conference at 9:30am this morning at which the FDA will announce emergency use authorisation of a blood plasma treatment for COVID-19.  The move comes after Trump accused the agency on Twitter of slowing down the approval process.  Separately, the FT reported that Trump was pushing for fast-track approval in October for the experimental vaccine being developed by Oxford University and AstraZeneca, should preliminary trials on 10,000 volunteers prove successful.  Usually, FDA approval would require trials on 30,000 people and such a move would meet resistance from some agency officials, according to the FT.

Turning to Friday’s market moves, US equities continued their relentless grind higher, driven by outperformance from the tech heavyweights.  The S&P500 increased 0.3%, bringing its week’s gain to 0.7%.  Apple, the world’s biggest company by market capitalisation, saw its stock price rise 5%.  Apple was boosted by a Bloomberg report that US administration officials were privately advising US firms that they would be able to keep using the Chinese app WeChat in China, despite Trump’s proposed ban in the US.  With the five largest US companies, all big tech firms, now accounting for more than 20% of the S&P500, their stock price movements have an increasingly outsized influence on the overall index.  By contrast, an equally-weighted version of the S&P500 fell 1.5% last week while the Russell 2000 index of smaller cap stocks was down by a similar amount.  The underperformance of smaller cap stocks is a sign that the market is still a little wary about the economic outlook.

The preliminary versions of the European PMIs unexpectedly fell back in August, suggesting the Eurozone recovery has lost some momentum.  Most of the weakness was in the services sector, which dropped from 54.7 to around 50.  This is consistent with the recent pickup in COVID-19 cases on the continent and re-imposition of some restrictions, including on cross-border travel.  The manufacturing PMI was down fractionally, disappointing market expectations for a further rise, but remains in expansionary territory.

The EUR fell almost 1% after the PMIs, although it recovered some of those losses later in the session, finishing the week just below 1.18.  It appears be consolidating below resistance at 1.20.  The EUR had a big appreciation last month (+5%), with sentiment buoyed by agreement on the EU Recovery Fund.  Speculative positioning in the EUR is near record-long levels based on CFTC data, leaving it vulnerable to a positioning shakeout.

US data was, in contrast to Europe, stronger than expected.  Both Markit PMI surveys beat expectations, with the services version bouncing to its highest level since March last year.  The market tends to pay more attention to the ISM surveys in the US, which are released early next month, but the bounce in the PMIs is a good sign.  The housing market remains a bright spot for the US economy, supported by low mortgage rates, with existing home sales hitting their highest level since 2006.  The Citi economic surprise index remains near a record high, showing that economists have underestimated the strength of the bounce back in activity.

The USD was generally stronger on Friday, supported by the contrasting data out of Europe and the US.  The Bloomberg USD index rose 0.3%, reversing its losses from earlier in the week.  Despite Friday’s moves, the USD remains near a two-year low.

The GBP underperformed after EU chief negotiator Barnier said a Brexit deal was “unlikely”, raising the prospect of a ‘hard Brexit’ at the end of the year.  The UK’s negotiator Frost echoed those sentiments, blaming the EU for the “little progress” made to date.  The EU wants an agreement by mid-October, so it can be ratified by national parliaments in time.  In the past, EU deals have often taken place at the last minute and there is a chance that negotiations could be extended beyond October, given the potentially huge economic implications from a hard Brexit.  The GBP fell 0.9% on Friday to 1.3090, although it remains near its highest levels of the year.  The market shrugged off stronger-than-expected UK PMIs.

The NZD managed to hold its ground on Friday, despite the USD strengthening against most other currencies.  The NZD closed at around 0.6540 on Friday, a similar level to where it started the week.  The NZD/AUD cross reversed its losses from the previous day, ending around 0.9130.

Global rates continued to drift lower on Friday despite the rise in equities and better US data.  The US 10-year Treasury yield fell 2bps on Friday and 8bps on the week, to 0.63%.  The fall in US rates last week reverses around half of its move from 0.51% to 0.72% over the prior two weeks.

The focus offshore this week is Fed Chair Powell’s Jackson Hole address on Thursday night where he will discuss the Fed’s review of its monetary policy framework.  The market expects the Fed to shift towards an ‘average inflation target’ framework whereby the central bank would aim to overshoot its 2% target for a period, to compensate for previous periods below target.  The timing of such a move is uncertain, with the minutes to the Fed’s last meeting noting that a number of participants thought it would be appropriate “at some point”, dampening expectations for a policy change in September. Expectations for a change in the Fed’s framework has supported market-implied inflation expectations, which have recovered all of their falls from the COVID shock.

In New Zealand, rates continue to head lower, with the 10-year swap rate closing in on 0.5% (-3bps on Friday).  In a livestream on Friday, RBNZ Chief Economist Yuong Ha claimed that negative interest rates offshore have stimulated higher levels of credit growth and lowered retail lending rates, reinforcing the now widely-held view that the RBNZ will cut the OCR to negative next year.

Separately, the RBNZ announced that it would increase its bond buying for this week.  The RBNZ will buy $1.35b of government bonds this week, up from $1.09b last week and $940m the week before.  Unlike earlier this year, the RBNZ has chosen not to skew purchases towards the long-end of the curve. The decision to increase purchases two weeks in a row is a clear signal that Bank staff, under the MPC’s broad directive, will try to use bond buying to push local rates lower in advance of a likely OCR cut to negative next year.

The RBNZ also increased its planned weekly purchases of local government bonds from $40m to $50m.  With credit spreads having tightened aggressively over the past few months, there has finally been a pickup in primary market activity, with Investcore property issuing $125m of a seven-year bond on Friday and Mercury energy announcing its intention to issue a new seven-year bond of their own.

At 4pm today, the government will announce its plans for the COVID-19 alert levels for Auckland the rest of the country.  Auckland is currently set to remain at Alert Level 3 until midnight on Wednesday and the rest of the country at Alert Level 2 until the same time.