Risk appetite is weaker, with the Republican party doing worse than expected in the US mid-term elections and the results still up in the air, some contagion worries after the meltdown in cryptocurrencies, and nerves ahead of tonight’s key US CPI release. The S&P500 is currently down about 1%, the USD is broadly stronger, with the NZD just under 0.59, and US Treasury yields are slightly lower.
US mid-term election results have been rolling in and the outcome might not be known for several weeks. The Republican party hasn’t done as well as the pre-election polls suggested, making the race much tighter than expected. For the House, CNN is currently calling the Republicans winning 203 seats and the Democrats 187, with 218 needed for a majority. In the Senate the count is 49 to 48 to the Republicans with 51 needed for a majority. A key win for the Democrats in Pennsylvania makes it near impossible for the Republicans to take the Senate. The Republicans are on track to take a slim majority in the House. The key Georgia Senate race looks headed for a run-off after neither candidate reached 50% (required under Georgia law) and this will be held 6 December.
While the outcome looks much closer than expected, it is still probably in line with the policy gridlock scenario the market has been anticipating. From a market perspective, this isn’t a bad outcome, with a tight rein kept on the fiscal levers, something needed against the backdrop of strong inflationary pressure. Risk appetite is slightly weaker, but the election result isn’t necessarily the key driver – weaker US equities and a stronger USD just partially reverse some of the recent moves.
A meltdown in the cryptocurrency space isn’t helping sentiment, with contagion risk in the air after the collapse of the FTX exchange and Binance seen as likely to back out of a deal to buy it. Bitcoin hit its lowest level in two years, going below the $17k mark, which some saw as a long-term support level.
US Treasuries rates are slightly lower, helped by the risk-off theme, even as there are some nerves ahead of tonight’s key US CPI report, which has surprised to the upside over five of the past six months based on the market reaction. The 2-year and 10-year Treasury yields are down 1bp, with the latter trading at 4.12%.
There has been little economic news. Yesterday, modest China inflation, with the CPI up 2.1% y/y and the PPI down 1.3% y/y continued to show a stark contrast to the strong inflationary pressure seen in major developed countries. This gives ample room for the PBoC to ease policy if it wanted, but a key constraint remains ongoing concern about easier policy inviting undesired speculative selling of the yuan.
In currency markets, the USD is broadly stronger, recovering some ground after three days of losses. GBP remains one of the more volatile major currencies, and is down 1.4% overnight to below 1.14. Both the NZD and AUD have seen losses of about 0.9-1% overnight, taking them down some 1.4% from this time yesterday. The NZD currently trades just below 0.59. AUD is back below 0.6450 and NZD/AUD is at 0.9150. With only small losses for EUR and JPY, NZD crosses against them are weaker.
The domestic rates market saw an unwinding of the upside pressure to rates of the previous session. NZGB yields were down 8-10bps across the curve, while swap rates were down 6-9bps. NZ electronic card transactions data rose 1.0% m/m in October, with higher inflation, the hospitality sector back on its feet and a bounce in durables spending after a weak run all in the mix. NZDM will launch the issue of a new 2034 nominal green bond next week, expecting to issue at least $2b and capped at $3b.
In the day ahead, the Review and Assessment of the Formulation and Implementation of RBNZ Monetary Policy will be published. This is a new report card, conducted by external experts, on how the Bank/MPC has done with its monetary policy over the last 5 years or so. This will include the use of its non-conventional tools, such as LSAP and FLP through the pandemic.
Tonight sees the release of the US CPI, where any notable deviation from consensus could trigger a significant market reaction. The CPI ex food and energy is expected to moderate to 0.5% m/m and 6.5% y/y, still too high for comfort.
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