Chinese assets rally as the authorities take steps to increase vaccination rates among the elderly, seen as another step towards eventually ending the zero-Covid policy. CNH appreciates more than 1%, Hang Seng surges 5%

Market sentiment has shown signs of rebounding over the past 24 hours as the Chinese authorities signalled steps to increase vaccination of the elderly, seen as another step towards the eventual abandonment of the zero-Covid policy next year.  The CNH is almost 1.5% stronger since this time yesterday, helping to lift the NZD back to 0.62, while the Hang Seng surged over 5%.  There hasn’t been much impact on broader markets however, with US equity markets slightly lower on the day.  European bond rates fell sharply after a lower-than-expected Spanish CPI release while the US 10-year rate rebounded back above 3.70%.  NZ rates were higher and steeper yesterday, with market expectations of the terminal OCR stabilising just above 5.40%.

Markets remain focused on China, where the authorities are trying to deal with their biggest Covid outbreak to date while keeping the population on-side with onerous restrictions.  Yesterday, the National Health Commission said it would aim to speed up vaccination rates among those over the age of 80, by encouraging (but not mandating) the elderly to get booster shots and using big data to identify those who haven’t yet had the vaccine.  To the extent the low vaccination take-up amongst elderly Chinese people has been a major impediment to lifting Covid restrictions, the announcement represents another step towards eventually moving away from the zero-Covid policy.  The Commission said it would allow people to take the Covid booster three months after a vaccine shot, pointing to a possible March/April timeline (after winter) for a more substantial rollback of zero-Covid restrictions.

Markets took the announcement positively, with conviction growing that China will likely end its zero-Covid policy at some point next year.  There will of course be an inevitable near-term hit to activity as Covid spreads more widely, but, for now, the market appears focused on the more positive medium-term economic outlook that would emerge once the country has adjusted to living with Covid.

Zhengzhou, home to Apple’s huge iPhone factory, announced an easing of its Covid restrictions from today, including those related to supermarkets, movie theatres and restaurants.  Bloomberg reported yesterday that Apple was facing a 6 million iPhone pro production shortfall due to disruptions at the factory.  Separately, in another positive development for Chinese growth, Chinese regulators lifted restrictions on homebuilders issuing equity, another measure aimed at supporting financing for the beleaguered property sector.

After the risk-off moves earlier this week, after the weekend protests in various cities in China, Chinese assets have rebounded sharply over the past 24 hours.  The Hang Seng surged over 5%, taking its gain on the month to almost 25%.  The CNH is 1.4% stronger than this time yesterday, with USD/CNH falling back below 7.15.  The NZD and AUD have followed the CNH higher, both up around 0.3% over the past 24 hours, outperforming the rest of the G10 currencies.  The NZD is trading back at 0.62 this morning while the AUD is approaching 0.67 again.

The positive vibes from China haven’t had much impact on broader equity markets, however.  The S&P500 is currently down slightly on the day (-0.3%), while the NASDAQ is off 0.5% and the EuroStoxx 600 index closed 0.1% lower. The Energy and Materials sectors of the S&P500 have outperformed, consistent with the market seeing a more positive medium-term outlook for Chinese commodity demand.

It’s been a mixed picture in the bond market overnight, with European rates sharply lower but US Treasury rates higher.  In Europe, Spanish CPI came in much lower than expected, at 6.6% y/y, well down on last month’s 7.3%, mainly driven by lower energy prices.  However, Spanish core inflation was marginally higher than the previous month, at 6.3% y/y.  German headline inflation matched market expectations at 11.3% y/y, down from 11.6% in October.  The German 10-year rate was down 7bps overnight, to 1.91%, as the Spanish and German inflation data eased fears of another upside surprise to European CPI tonight.  ECB officials have recently highlighted this CPI release will be pivotal in the debate about whether they should step down the pace of tightening to 50bps next month or hike by 75bps again.

In contrast, US rates have shifted higher, with the 2-year Treasury rate up 3bps and the 10-year rate increasing 5bps, to 3.73%.  The move higher in US rates might reflect some profit-taking among investors after the recent US bond rally, with several key event risks looming including Powell’s speech tomorrow night and nonfarm payrolls at the end of the week.

Currency moves have been relatively modest for the majors.  The DXY index is unchanged on the day while the EUR has tracked a relatively narrow range over the past 24 hours, currently sitting at 1.0340.  The big underperformer has been the CAD, down over 1% since this time yesterday, to 1.36, despite Canadian GDP beating market expectations.

In economic data, the Conference Board US consumer confidence index weakened in November, although it remains well above the lows seen mid-year when oil prices were surging higher. Meanwhile there was little change in the balance between those reporting jobs as plentiful versus hard to get.  This so-called ‘jobs differential’ has softened in 2022 which is usually associated with a rising unemployment rate.

NZ rates were higher yesterday, and the curve steeper for a change, as global rates pushed higher during the local trading session.  The 2-year swap rate was 3bps higher, at 5.20%, while the 10-year rate was up 5bps. Market expectations for the peak in the OCR seem to have stabilised just above 5.40% for the meantime.

There is a lot on the schedule for the session ahead, as the table below illustrates.  In the local session we get the ANZ business survey, where we will be particularly focused on the forward-looking pricing and employment intentions indicators, the new monthly Australian CPI release and the Chinese official PMIs.  Tonight sees the release of European CPI, where markets are looking for a deceleration in the pace of headline inflation (albeit to what is expected to still be above 10% y/y) and steady core inflation, at 5% y/y.  In the US, the revamped ADP employment report, the Chicago PMI, and job openings (one of Fed Chair Powell’s favourite indicators) data are released as well as speeches by Fed Governors Cook and Bowman.