European markets were cheered last night after UK Prime Minister Johnson announced a staged removal of lockdown restrictions through to June 21, with global vaccinations running at closer to twice the 122m of global confirmed cases. Supporting sentiment were the prospect of more fiscal stimulus, with Congressional Democrats remaining on track to push through Biden’s USD1.9tr stimulus package before the March 14 expiration of unemployment insurance benefits, despite widespread Republican opposition. The stimulus package is set to pass through the House at the end of this week and in the Senate a week later.
Central bankers have tried their best to douse fears that the global economy is overheating. Yields retraced earlier gains after ECB President Lagarde warned the ECB will be “closely monitoring” yields with the ECB pledging to keep financing conditions favourable. Last night Fed Chair Powell signalled the US economy is still very far from its employment and inflation objectives. The Fed was a long way away from considering the withdrawal of monetary support, maintaining its USD120bn monthly QE programme until “substantial further progress” has been made. Powell downplayed inflationary concerns calling the recent back-up in global yields “a statement of confidence” in the outlook. Comments by Bank of Canada Governor Macklem this morning was from the same central bank script.
Despite Powell’s comments, US Treasury yields were little changed overnight (10Y 1.36%). European 10-year yields were uniformly higher, with a curve steepening bias. NZ yields retraced some of their previous climb, with a modest flattening bias. Despite no purchases from the RBA, there were more sizeable falls for Australian yields. Energy prices largely held onto recent gains that had been underpinned by upbeat expectations for future (post-COVD) demand. Near-term contract prices for Brent crude (USD65 per barrel) and WTI (nearing USD62) hovered below 2-year highs. Prices for copper continued to firm, while growing stockpiles in China saw modest falls for iron ore prices. Other metals prices were lower.
Major US equity indices fell sharply on the market open but lifted after Fed Chair Powell’s comments. At the time of writing the S&P500 (-0.8%), Dow (-0.4%) and Nasdaq (-1.9%) were still in negative territory, with the S&P500 close to 3% below last week’s record high. Weakness was evident in technology and consumer discretionary stocks, with investors switching to utilities and energies. European equities were mixed (DAX -0.6%, Euro Stoxx 50 -0.3%, FTSE 100 +0.2%). Asian equities were generally higher, but the recent back-up in NZ yields dampened NZ equities, with the NZSX 50 down 0.3%.
US house prices rose 1.25% mom on the 20-city S&P measure (10.1% yoy, the highest since April 2014). Consumer confidence (Conference Board measure) ticked up to 91.3 (mkt: 90), with a sharp improvement in respondents’ assessment of their present situation (92 from 85.5). UK employment fell 114k in the 3 months to December (mkt: -30k), with the unemployment rate ticking up to 5.1%. Average weekly earnings were likely flattered by job losses for the lower paid (+4.7% yoy).
Today’s RBNZ decision looms. Monetary conditions have tightened appreciably since the November statement, with the NZD about 5% higher than assumed (71.5), with NZ swap yields having gained 20bps to 90bps (10y 0.80) across the curve. Much of this looks to be justified by the improved outlook, although there is the risk that markets may have moved too much too soon. It' is expected that the RBNZ will do its best to hold back the tide by highlighting the risks and uncertainties to the outlook. The RBNZ may well extend the June 2022 date of the $100bn Large-Scale Asset Purchase programme, but it is expected that cumulative purchases to comfortably fall below the $100bn threshold as the RBNZ tapers and then halts asset purchases ahead of hiking the OCR in August 2022.
The first of the NZ activity data prints for Q4 highlighted the risk of contraction, with a larger than expected 2.7% Q4 fall in retail volumes (+4.8% yoy), with broad-based quarterly declines in volumes and a spike in retail prices. NZ December lending figures finally released yesterday by the RBNZ showed that housing borrowing surged 8.2% over 2020, the highest pace since April 2017. Despite low deposit interest rates, 2020 saw a 9.8% gain in household deposits (highest since May 2016). Agricultural sector lending (-0.9% yoy) and business lending (-3.5% yoy) contracted over 2020.
FX Update: The increasing optimism in the UK saw sterling at the top of the G10 leader board, with the NZD also making gains against most majors. The NZD traded in a 0.7300 to 0.7350 USD range overnight and has eased to 0.928 AUD. A dovish RBNZ economic assessment today could further weigh on the NZD. We still believe there are more positives than negatives pertaining to NZD direction.