Financial markets have continued to consolidate over the past 24 hours following the bond market craziness of late last week. Stocks are flat to lower after China’s banking regulator publicly worried about bubbles in financial markets. German economic data was also a little softer. Bond yields have traded in a narrow sideways range and oil prices are flat around US$64/barrel (Brent). The NZD/USD and NZ wholesale interest rates have mostly sustained their big Friday dip, although the former is starting to creep higher and we think this will continue.
Reinforcing the NZD’s sturdy fundamentals, NZ’s terms of trade rose a further 1.3% yesterday (1.0% market expectations) and, overnight, dairy prices went ballistic at the fortnightly GDT auction. Whole milk powder prices surged 21% at the auction with smaller but still decent price rises for other commodities (skim milk powder +3.5%, butter +13.7%, cheese +1.3%).
Helping keep a lid on yields yesterday was RBNZ Assistant Governor Hawkesby who joined the chorus of central bankers hitting the wires recently to lean against the big rise in bond yields. It was the third occasion since last Wednesday’s MPS the RBNZ has been out publicly running a “patience” line. The Bank continues to hold a cautious view on the economic recovery and is playing up the downside risks. It’s a message that interest rate traders have only partly taken on board with OIS pricing still consistent with a full 25bps rate hike by next August.
Hawkesby again flagged the tools at the Bank’s disposal (more bond purchases, lower OCR) that could be used to combat any further market silliness. Most of the speech was in keeping with prior commentary and hence elicited next to no market reaction. However, reading between the lines it does appear the Bank is concerned about speculation it could be amongst the first globally to lift rates, given the attendant NZD implications. This should ensure NZ long-end rates remain closely correlated to their US counterparts.
Yesterday’s monthly filled jobs update tended to support the view the peak in NZ unemployment is behind us. Filled jobs were flat in January, effectively banking December’s strong 0.7% mom increase. This should be seen as an encouraging result given the risk of job losses through the summer due to the absence of the usual peak inflows of overseas tourists.
FX Update: The NZD/USD didn’t really react to the stonker of a GDT result but is nevertheless ½ cent or so higher around 0.7300 thanks to a general weakening in the USD. Our view has been that the NZD will remain bid on dips such as we saw on Friday given its positive fundamentals. We think the recovery can extent over the next few days assuming risk sentiment continues to hold up.
Locally there’s a bunch of second tier data that markets will largely ignore (ANZ commodity prices & building consents), but in Australia fourth quarter GDP will be in focus. We expect a strong 2.6% qoq increase. Such an outcome would see GDP in 2020 contract by 2.6% (annual average), a great result compared to initial expectations, but not quite up there with NZ’s recovery.