Not a whole lot of news to drive markets overnight resulting in broadly flat US equity markets and little change in bond yields. Some minor moves in currencies, with the US dollar a touch weaker.
World equity markets are mixed. US indices are broadly flat, European gauges bounced back strongly from the previous day’s declines (helped by M&A activity), while Asian markets came under downward pressure yesterday after reports of a PBoC advisor warning of possible market bubbles as a result of excessive liquidity and ultra-low borrowing costs (the Hang Seng closed 2.5% down). The S&P500 currently sits marginally lower ahead of key earnings results and FOMC meeting tomorrow morning.
No change is expected from the Fed in either rates or QE guidance, but Chair Powell is likely to be quizzed in the post-meeting press conference about President Biden’s $1.9T stimulus plan and what that might mean if it materialises.
On the virus, even though new daily case numbers are falling in the US, UK, and some parts of Europe, as new restrictive measures have some effect, much concern remains. Deaths in the UK have now surpassed 100,000.
On a positive note, the IMF raised its global growth forecast for 2021 to 5.5% from the 5.2% it anticipated back in October, suggesting vaccines and more fiscal stimulus will eventually offset the immediate virus challenges.
To that point, vaccine coverage won’t reach a point that would stop transmission of the virus in the foreseeable future, the World Health Organization said yesterday. Encouragingly, Pfizer said it would deliver US vaccine doses faster than expected.
In other news, Janet Yellen has been confirmed by the Senate to lead the US Treasury and will play a key role in advancing President Biden’s economic agenda. That doesn’t mean the US stimulus package will sail through. Senate Republican Leader, Mitch McConnell, said that ‘I expect we’ll have no shortage of spirited policy discussions with Dr. Yellen in the months ahead’. Overall, still no clarity or sense of urgency on US stimulus plans.
In currencies, the USD is marginally weaker on the day with the DXY down around 0.2%. The EUR pared earlier gains on reports the ECB have agreed to look deeper into the EUR’s appreciation against the dollar since the start of the pandemic. After pushing up towards 1.2180, EUR dipped to around 1.2140, before recovering to around 1.2160 now.
GBP is up 0.4% on the day to around 1.3730, helped by better than expected UK employment data. But you know expectations are low when an 88k job loss comes as a positive surprise.
The IMF global growth upgrade helped pro-cyclical currencies like the NZD, AUD, and CAD, which were all up around 0.3% to 0.4% against the USD and heading the majors’ currency leader board.
After trading a tight 20 pip range in the local session yesterday, the NZD dipped to just under 0.7170 late last night on the Asian equity swoon. Overnight it pushed up toward 0.7250 – its highest level since the first trading week of the year. NZD opens this morning around 0.7240.
News on NZ’s recent community COVID case has been encouraging. It will be sometime before the extent of any outbreak is known, but all close contacts tested so far (15 people) have returned negative tests. A test from another close contact is pending. Markets remain calm. Meanwhile, PM Ardern says NZ may approve its first vaccine (from Pfizer/BioNTech) next week.
NZ and China signed an upgrade to their free trade agreement yesterday. Markets were unmoved as the signing was essentially a formality of the deal settled more than a year ago. But in today’s age of circulating trade tensions, it is a positive step of note.
The AUD followed a similar pattern to the NZD after being subdued yesterday during the Australia Day holiday. Nonetheless, NZD/AUD has continued its slow but persistent recent trek higher over the past week, opening this morning around 0.9350.
There’s a chance of some more AUD movement today with Australia’s Q4 CPI data due. But we don’t expect any major surprise. The market expects 0.7% quarterly headline inflation, and 0.4% quarterly inflation in the trimmed mean and weighted median. Our NAB colleagues expect quarterly inflation of 0.9% headline and 0.4% core. This would see core annual inflation come in around 1.1%, still well below the RBA’s 2-3% inflation target.
There was little movement in US yields overnight. The US 10-year Treasury yield is barely a point higher at around 1.04%. It was much the same across most of Europe, with the minor exception of Italy where 10-year bond yields fell around 3 bps as PM Conte resigned.
Local bond and swap yields edged lower yesterday essentially following moves in the previous offshore session. Prior offshore caution filtered into NZ markets, seeing local swap yields lower and the curve flatter. 2-year swap fell a basis point to close at 0.30%, while the 10-year swap fell by 5bps to just under 1.11%. The 10-year swap rate is now close to unwinding all of its gains after last week’s stronger than expected CPI inflation.
Looking to the day ahead, the Australian CPI and NAB business survey will be of most interest in the local session today, while US durable orders are due out overnight.
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