Market moves subdued after the US Thanksgiving holiday. Markets unperturbed so far by news of rising Covid cases in China and further piecemeal restrictions by the authorities

It was a relatively quiet end to the week for markets, with US trading activity unsurprisingly much lighter than usual given Thursday’s Thanksgiving holiday.  Equity markets and currencies were little changed, the NZD ending the week at 0.6250.  European bond rates were sharply higher as the market digested hawkish ECB comments, but the US 10-year rate was little moved, ending the week just under 3.70%.  NZ rates consolidated on Friday, with market expectations for the peak in the OCR continuing to hover around 5.50%, consistent with the RBNZ’s November MPS projections.

US markets were much quieter than usual on Friday, with many investors taking a long weekend for Thanksgiving.  Markets are keeping a watchful eye on the Covid outbreak in China, where national daily cases now exceed 30,000, and the local authorities’ response.  So far, the authorities have refrained from imposing a city-wide lockdown in Beijing, despite rising case numbers, although schools have been closed in a number of districts and Bloomberg reports that major streets are deserted.  In Guangzhou, which has also seen cases spike, officials denied there are plans for a broader lockdown.  Local authorities are struggling to manage rising case numbers while adhering to the State Council’s new guidance for less heavy-handed restrictions.  Meanwhile, anti-government protests erupted in several cities over the weekend, triggered by a deadly fire in a locked down apartment block in the city of Urumqi.

So far, markets have been unperturbed by the rising Covid case numbers, with many investors of the view that China is entering a transition period that will ultimately result in the end to the zero-Covid policy at some point next year.  However, rolling Covid restrictions can be expected in the coming months, to avoid overwhelming the hospital system, which will hit economic growth and supply chains in the short term.  Markets may open with a more cautious tone this morning after the weekend protests, which could lead to a government crackdown on protesters.

In response to the economic slowdown, the PBOC on Friday cut the reserve ratio requirement for the major banks by 25bps, to 11%, the first time since April and as foreshadowed by a State Council announcement earlier in the week.  The RRR cut will release an estimated US$70b of liquidity in the banking system, supporting the recent drive by policymakers to support the ailing property sector.  USD/CNH pushed above 7.20 on Friday in the wake of the RRR cut, the first time in two weeks, before closing just below that level.

US equities were little changed on a shortened trading session on Friday, the S&P500 flat on the day and the NASDAQ down 0.5%.  The S&P500 was up 1.5% on the week, now trading near its highest level in 2½ months.  Market sentiment has been notably less pessimistic since the recent lower-than-expected US CPI print, which seems to have halted the uptrend in global rates for the meantime, and speculation China is moving in the direction of ultimately ending its zero-Covid policy.

Friday saw a big move higher in European bond rates, the German 10-year rate increasing 12bps, to just below 2%, and the UK 10-year rate increasing 9bps.  The market continues to digest the hawkish speech from influential ECB official Schnabel, who said on Thursday night there was “limited ” scope to slow down the pace of rate hikes.  The ECB has raised rates by 75bps at each of the past two meetings and the market had speculated that it may step down to a 50bps hike in December.  The market is now pricing around a 50% chance of third successive 75bps ECB rate hike.  On Friday, fellow ECB official Muller pushed back against talk that the end of the hiking cycle may be drawing nearer, saying the main risk was stopping tightening too soon, before inflation was properly under control.

US Treasury rates shrugged off the European bond sell-off, with the US 10-year rate closing the week at 3.68%, little changed from Friday’s opening levels.  The US 10-year rate is now at its lowest level since the start of October, 65bps off its recent post-GFC high.

Currency moves were also modest on Friday, the USD consolidating after its sharp falls earlier in the week.  The EUR ended the week at 1.0395, just above its 200-day moving average, while USD/JPY nudged up to 139.20. After its recent strong run, the NZD was slightly lower on Friday, ending the week at 0.6250.  It was the sixth consecutive weekly gain for the NZD (+1.6%) and some consolidation is likely in order after a ~13% appreciation since mid-October.

Negotiations between EU countries over a price cap for Russian oil broke down on Friday, Poland one of the countries to object to the price level being set above levels Russia currently sells at, meaning it would likely have little impact.  The WSJ reported a deal is still expected to be agreed before the planned 5 December implementation date. Oil prices were lower again on Friday, by around 2% on Brent crude, taking their weekly loss to almost 5%.

Tokyo CPI inflation was higher than expected once again in November, with the so-called ‘core-core’ measure (ex. fresh food and energy) hitting 2.5% y/y, foreshadowing another strong nationwide CPI print later next month.  BoJ Governor Kuroda has rebuffed talk that the BoJ might amend its yield cap policy on the 10-year bond, but the market continues to price the risk of an eventual shift (seen in the relatively wide gap between the Japanese 10-year swap rate and the artificially depressed 0.25% bond yield).

In domestic data, the ANZ Consumer Confidence index fell back to 80.7 in November, near record lows.  Low consumer confidence is no surprise considering the rapid increase in mortgage rates, high inflation (which is eroding real spending power) and falling house prices.  While consumer confidence remains at depressed levels, consumer spending appears to be holding up, for now at least.  Retail spending volumes were up 0.4% in Q3, amidst signs of consumers switching from spending on goods to services.

NZ short-end rates were little changed on Friday, consolidating after their big moves higher after the RBNZ’s very hawkish MPS.   The 2-year swap rate ended the week at 5.23%, around 20bps higher than it was before the MPS, with the market pricing a peak in the OCR just below 5.50%. In contrast, the 10-year swap rate, at 4.43%, is only modestly higher than its pre-MPS levels.  The 2y10y swap curve remains deeply inverted, at -83bps, consistent with the market expecting a major recession next year and ultimately a pivot towards rate cuts.  Flattening pressure was also evident in the bond curve on Friday, with the 2-year bond yield 6bps higher on the session while the 30-year yield was 4bps lower.

There is more central bank-speak on the agenda in the session ahead, including ECB President Lagarde and Fed officials Williams and Bullard.  Australian retail sales are released this afternoon.  There’s plenty to look forward to later this week, with Fed Chair Powell speaking on “The economy and labour market” on Wednesday night, the ISM Manufacturing survey released on Thursday night (with the market looking for the first sub-50 reading for the cycle) and nonfarm payrolls due on Friday night (with the market looking for 200k job growth and an unchanged unemployment rate of 3.7%).  In Europe, the all-important CPI release takes place on Wednesday night, with the market looking for a step down in monthly inflation to 0.2% (which would still see annual inflation of 10.4% y/y).    Core inflation is expected to remain well above the ECB’s target, at 5% y/y.  Locally, the focus will be on the ANZ business survey and particularly its pricing and employment intentions series.  We will also be watching out for any interviews with Governor Orr and his deputies in the next few days.