The recent softer tone for global equities continued overnight, with the S&P down 0.9% in afternoon trade, and setting up for the third consecutive day of declines. The lacklustre performance of equities comes as investors have pared back bets on rapid policy easing, though the S&P is only ~1.5% below its all-time high, reached earlier in the month. European equity indices also closed lower. Global bond markets were mixed while the US dollar extended its recent gains. Spot gold prices pulled back from a record high, set in the Asian session, just below US$2760.
There was only second-tier US economic data. Sales of existing homes declined to the lowest level in 14 years with elevated mortgage rates and the uncertainty around the election impacting demand. Market activity is likely to remain subdued. The average interest rate on existing mortgages is 4%, compared with 6.5% for new mortgage, creating an incentive to homeowners not to move.
US treasuries traded modestly higher in yield led by the front end. There has been no retracement despite the large move higher in yields over the past few weeks with investor sentiment impacted by the upcoming election. 2-year yields are up 4bp to 4.07%, while 10-year yields lagged the move, and are up 2bp at 4.22%. The US$13 20-year auction tailed by more than 1bp which didn’t help market sentiment. German 10-year bunds closed 1bp lower at 2.30% while 40-year Japanese government bonds reached 2.54% yesterday, the highest level in 16 years.
The Bank of Canada lowered its target for the overnight rate by 50bp to 3.75% which was in line with expectations. That followed three consecutive 25bp reductions from a peak rate of 5.0%. The larger cut was aimed at boosting economic growth with inflation and inflation expectations back towards target. The Bank expects to cut rates further if the economy evolves in line with their expectations. The market is pricing a terminal rate near 2.75% in July next year. The rate adjustment was well-anticipated and had limited lasting impact on the Canadian dollar.
The US dollar extended higher overnight. The move began at the beginning of the month when the market pared Fed easing expectations, and the increased uncertainty ahead of the US election, is also providing support. The US dollar index advanced 0.4% and is at the highest level since July. In the major pairings, USD/JPY traded above 153 before retracing while EUR/USD slipped further below 1.08.
The Australasian currencies moved lower set against the backdrop of a stronger US dollar. NZD/USD traded below the 0.6000 to the lowest level since mid-August. The NZD is weaker on the major European cross rates, but little changed against the AUD and JPY.
NZ fixed income yields traded marginally higher in the local session yesterday with no domestic economic data to provide direction. 2-year swap rates ended unchanged at 3.67% while 10-year rates increased 2bp to 4.22%. The 2y/10y swap curve has steepened further, and reached fresh cycle highs of 55bp, with the move looking increasingly stretched in the short term. 10-year NZGB yields closed 2bp higher at 4.51%.
Australian 10-year government bond futures are little changed since the local close yesterday suggesting limited directional bias for NZ yields on the open. The weekly government bond tender has been cancelled today as is typical in a syndication week.
It is another quiet day on the economic calendar with no domestic or regional data. The focus will centre on advance PMIs for Europe and the US later this evening. The European Central Bank noted recent downside surprises to economic activity in the statement accompanying the decision to cut rates last week. Consensus expectations are for European PMIs to be little changed from September.
US initial jobless claims are likely to remain noisy reflecting the recent hurricanes and strike at Boeing. The consensus looks for claims to remain stable though some analysts expect a sharp rise which can be looked through. The PMI data is not likely impacted by the recent weather events and the consensus estimate for the composite PMI is unchanged relative to September.
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