Bond yields and equities rebound modestly overnight, USD weaker. NZ curve flattening continues - 2y10y swap curve approaching record levels of inversion

It has been a quiet night in markets overnight with no major economic data released and investors waiting on several key event risks next week (Fed and ECB meetings, US CPI).  Global rates have rebounded modestly from the previous day’s big falls while equity markets are slightly higher, and the USD is weaker.  The NZD has edged higher towards 0.64. Yesterday saw further NZ curve flattening, with the 2y10y swap curve approaching record levels of inversion.

It has been a quiet night for news overnight and market moves have been relatively subdued.  Bloomberg and the FT report that Covid cases in China are now picking up rapidly following the recent loosening of restrictions and there has been panic buying of medicines and RATS tests.  Economic activity is bound to take a hit in the near term as Covid spreads more widely and people go off work sick.  But the market has been unperturbed, seeing the shift towards reopening in China as pointing to a stronger medium-term outlook for Chinese (and by extension, global) growth.

Bloomberg is also reporting that China is set to announce further measures to support the property sector next week as the government refocuses on the economy.  The authorities are expected to announce a 5% GDP growth target for next year which many analysts are sceptical can be achieved if the property sector remains under severe pressure.  Industrial commodities are higher overnight amidst hopes for a rebound in the property sector, iron ore futures nearing their highest levels in five months.

Economic data overnight has been second tier and not market moving.  US jobless claims continue to gradually trend higher, albeit to levels which are still very low (and consistent with a tight labour market) on a historical basis.  Meanwhile, continuing claims reached their highest level since February, at 1671k, suggesting those that are losing their jobs are finding it harder to find new ones.  The 27% increase in continuing claims from its lows over the past year has historically been a US recession signal.

Global rates have rebounded overnight, although the moves haven’t been particularly large in the context of recent high volatility.  The US 10-year rate, which closed at a 2½-month low yesterday morning, is 6bps higher overnight, at 3.48%.  The 2y10y yield curve, at -83bps, remains near its most inverted levels in over 40 years, pointing to an almost certain US recession next year.  Germany’s 10-year bond rate was 4bps higher overnight, at 1.82%.

Equity markets are slightly higher overnight. After five consecutive days of losses, the S&P500 is up 0.5% overnight while the NASDAQ is almost 1% higher.  The Hang Seng has continued its recent stellar run, up over 3% yesterday as the Hong Kong government reduced isolation requirements for Covid cases from 7 days to 5 days, taking its cumulative increase since the end of October to over 30%.

The USD is broadly weaker overnight amid firmer risk appetite. The BBDXY USD index is down 0.2%, with commodity currencies leading the way (AUD, CAD, NOK all up 0.5%-0.6% over the past 24 hours).  The EUR is up 0.4%, to around 1.0550, now approaching its highest level in six months.  The NZD has lagged the other commodity currencies but has still pushed up to 0.6370.

Turning to domestic developments, data from SEEK showed a sharp decline in job advertisements in November, down a seasonally adjusted 8% on the month, while the number of applicants-per-ad continued to rise, suggesting some heat is coming out of the labour market.  Besides job ads, which now show a clearer declining trend, other indicators are starting to show signs of slowing labour demand, including negative employment intentions from the ANZ Business survey.  We think the risks are skewed towards the RBNZ hiking by less than its most recent OCR projections rather than more.

In the domestic rates market, the relentless curve flattening trend continued yesterday, with the 2y10y swap curve pushing down to -92bps, now in sight of its all-time lows (reached in early 2008) of -100bps.  The 2-year swap rate was unchanged on the day, at 5.12%, while the 10-year drifted down 2bps amid a backdrop of lower global rates during yesterday’s trading session.  Yesterday’s bond tender saw firm demand, with all three bonds achieving bid-to-cover ratios in excess of 2, welcome news after last week’s undersubscribed tender of 2033 maturity bonds.  The 10-year NZGB yield was 3bps lower, closing just above 4%.

NZ electronic card spending data is released this morning as well as manufacturing, wholesale trade and service sector indicators which will help us refine our GDP pick for Q3 (currently sitting at 1.0% q/q).  The US PPI release tonight will likely get more market attention than usual as it takes place ahead of the all-important CPI release next week.  The market is anticipating a further sharp slowing in annual core PPI inflation, from 6.7% to 5.9%.  The University of Michigan consumer confidence index is also released, expected to remain at rock-bottom levels.