Rollercoaster ride in markets: US equities fall. US Treasury yields up significantly. Chinese rumours twist their markets

The market has been on a rollercoaster ride, with stronger risk appetite on rumours of China looking to end its zero-COVID policy and hope for weaker US economic data. That rumour on zero-COVID proved untrue and a much stronger than expected US JOLTS reports has seen a big unwind of prior movements.  The NZD is back to 0.5840 after breaking up through 0.59 and the US 10-year rate is back at 4.05% after a trip down to 3.92%. NZD/AUD has pushed higher after the RBA delivered another 25bps hike.

Risk appetite improved yesterday afternoon on an unverified social media post, which was widely circulated, suggesting that a committee was being formed to assess scenarios on China’s exit from zero COVID19 policy. This triggered stronger commodity currencies, a weaker USD, higher US equity futures, and surging Chinese and Hong Kong equities. These movements were pared back when a Chinese Foreign Ministry spokesman said he was not aware of a committee on ending the policy.

Risk appetite suffered another blow after the stronger than expected US JOLTS report on the labour market. After the surprise 10% fall in job openings in August, the market was expecting a further decline, but it unexpectedly rose, and August was revised up to boot. In the end the figure was some 1 million stronger than expected at 10.7m. The job openings to unemployed ratio, which Fed Chair Powell wants to see closer to 1, rose back up from 1.71 to 1.86. Clearly the US labour market remains too hot for the Fed to become comfortable on the outlook for wages.

There was a chance of the US ISM manufacturing index printing below 50, suggested by weaker regional figures, but in the end it fell to only 50.2, close to market expectations, with some of the key underlying components like employment and new orders rising slightly. Supplier deliveries fell, dragging the composite index lower, suggesting less supply chain issues.

Overall, the data didn’t provide the hope the market was looking forward to justify a less hawkish tone from the Fed at its policy announcement in 48 hours. US Treasuries were heading much lower into the release, with the 2-year rate down as low as 4.40% and the 10-year at 3.92%, but the stronger data sees these yields back up to 4.53% and 4.05% respectively, a sharp turnaround. S&P500 futures were up over 1% heading into the economic releases, but with the fall in risk sentiment sees the S&P500 index currently down 0.4%.

The USD was on a downward trajectory on the higher risk appetite backdrop before a sharp reversal ensued, with the net change close to zero for the day. On the back of this swing, the NZD temporarily broke up through 0.59, but has settled back down to 0.5840, still up about 0.5% from this time yesterday.

The AUD is on the weaker side of the ledger after the RBA’s statement wasn’t as hawkish as some were looking for. The RBA raised its cash rate by 25bps again to 2.85%, as widely expected by most, although there was a chance of a step back up to 50bps. The outlook statement showed an intent to move in baby 25bps steps from here, even with inflation remaining above the top of its 2-3% target range by the end of 2024. The net change in the 3-year bond future has been a 10bps fall in yield terms, with the market paring future rate hike expectations. The AUD temporarily fell about 30pips, before greater global forces took over.  The AUD is trading back just under 0.64 and NZD/AUD has continued to push higher and sits at a 5-month high of 0.9140.

Other NZD crosses are higher, with NZD/GBP near 0.51 and NZD/EUR up through 0.59, the NZD continuing its strong momentum through late October and anticipation of strong labour market reports today (see below) providing some support.

The overnight GDT dairy auction was another weak one, with the price index down 3.9%, the third consecutive chunky fall. Whole milk powder prices fell 3.4% while skim milk powder fell 8.5%. Market pricing for Fonterra’s FY23 milk price has been steadily falling over the past month, closing yesterday at $9, gravitating towards our long-held forecast of $8.90.

The BoE kicked off it quantitative tightening programme, successfully selling £750m gilts back to the market, a remarkable achievement after last month’s turmoil in the market which saw it needing to buy gilts during a period of turmoil. The Bank is looking to actively sell about £40b of gilts back to the market over the next year.

The NZ bond market showed a big reversal after yields were driven lower on strong demand for NZGBs on their entry into the FTSE-Russell World Government Bond Index. Rates were 10-17bps higher across the curve, with the largest movements at the shorter end of the curve. It was a reminder of the perils of passive index following (buy high, sell low), with active funds licking their lips and taking advantage of mispricing in the market to put on profitable trades. NZGBs remain relatively expensive compared to other fixed income assets.

In the day ahead the RBNZ’s Financial Stability Report this morning won’t excite the market but the two labour market reports later this morning will. The consensus is picking a fresh multi-decade low in the unemployment rate of 3.2%, assuming we get some measured employment growth after three flat quarters. There will be as much interest in the wages data, which will continue to show surging wages pressure, but still barely keeping up with CPI inflation. The data are the last key releases ahead of the next RBNZ MPR, which is likely to become another debate between a 50bps or 75bps hike amongst the committee.

Tonight, US ADP employment is released, with the revamped survey still in its infancy to give any clear guidance as to the more important employment report at the end of the week.