The new week has begun with a partial reversal of what we saw last week, with global equities weaker, US Treasury yields higher and the USD stronger. Good news is bad news for markets, with surprising strength in the US ISM services index a key driver of the moves. Chinese assets were well supported following further easing of COVID-related restrictions. This spilled over into NZD and AUD strength, until overnight price action sent them both down over a cent.
The market remains sensitive to the US monetary policy outlook. Hot on the heels of Friday’s surprising strength in wages, the US ISM services index showed a surprising lift of 2.1 points in November to 56.5, against expectations of a modest drop, leaving it 3 points ahead of expectations. The detail of the release showed new orders slightly lower at 56.0 and employment up over 2 points to 51.5. Prices paid showed a small drop to a still-uncomfortably high 70.0. The release was certainly a surprise and the headline figure contrasted with the final Services PMI coming in at 46.2. So there you have it, two indicators trying to measure the same thing, one suggesting the US services economy is performing well (the index with a longer history and with less volatility) and the other one suggesting it is contracting.
US Treasury yields were already drifting higher ahead of the release, with the strong data sending rates even higher, unwinding some of the notable fall in rates seen last week. The 2 and 10-year rate are currently up 8bps and 10bps respectively to 4.35% and 3.58%. The S&P500 has spent the entire session in negative territory and is currently down 1½%. The strong data supported the USD, with the DXY index currently up 0.6%.
The Fed is in a blackout period ahead of its meeting next week, which is the time the market pays attention to the WSJ’s Nick Timiraos. He notes that the Fed has signalled plans to step down to a 50bps hike but “brisk wage growth or higher inflation in labour-intensive service sectors of the economy could lead more of them to support raising their benchmark rate next year above the 5% currently anticipated by investors.” The market wouldn’t see anything surprising in those comments, being consistent with the Fed-speak we’ve heard over recent weeks.
Yesterday, China and Hong Kong’s key equity market benchmarks rose 2% and 4½% respectively and the yuan strengthened following the weekend news that China was undertaking further easing of COVID-related restrictions, a further step away from the strict zero-COVID policy. These included reduced testing requirements which will allow more mobility and increased economic activity. USD/CNY fell below 7 for the first time since September and closed down 1.3% at 6.9625.
The stronger yuan spilled over into the NZD and AUD, with the stronger USD overnight sending them smartly lower. The NZD traded at a fresh 3-month high just over 0.6440 and it has since fallen by over a cent to 0.6315. In our weekly update yesterday we noted that the NZD was well overdue for some consolidation, after its very strong run. The technical RSI was above the “sell” level of 70 and it has since moved down to 64. The AUD has followed a similar path, peaking over 0.6850 and currently down close to 0.67. NZD/AUD has oscillated around 0.94 and currently sits at 0.9415.
The yen, the largest mover last week, has come under the most pressure against the backdrop of higher US Treasury yields, with USD/JPY up 1.7% since last week’s close to 136.60. EUR has slipped back below 1.05 while the GBP has fallen below 1.22.
The domestic rates market had an uneventful session yesterday, with rates flat to lower across the curves. The 2-year swap rate was flat at 5.01% while the 10-year rate fell 2bps to 4.22%. The 10-year NZGB fell 1bp to 3.96%. Since the NZ close the 10-year Australian bond future has showed little net change in yield against a 6bps lift in the US 10-year rate.
In the day ahead, focus turns to the RBA’s policy update this afternoon, where 29 out of 30 economists surveyed by Bloomberg expect a 25bps hike to 3.1%, with the outlier expecting a 15bps hike to round off the cash rate to 3.0%. The market prices about a 75% chance of a 25bps hike. Economic data released are second tier, with NZ building work and Australia’s current account balance today and German factory orders and US trade balance tonight.
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