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  • Writer's pictureVince

The bond market sell-offs accelerate influence overall financial markets

Global equity markets’ barnstorming run hit a small speedbump overnight, contributing to a slightly more cautious tone across broader financial markets. The main US stock indices are down 0.4-0.9% but are still within spitting distance of record highs. The VIX (risk aversion) index is up 2 percentage points to 23% but there’s been little fallout elsewhere. Indicative of such, the typically ‘safe-have’ USD actually fell a little, with European currencies, notably GBP, leading gains.

A weaker-than-expected set of US jobless claims figures (861k vs. 756k expected) weighed on sentiment a little, while US housing data was mixed. Building permits surged 10.4% mom in January but housing starts unexpectedly fell 6%. The US labour market is perhaps more important for markets given the Fed’s laser-like focus on such, and initial jobless claims have remained stubbornly high around 800k per week since late last year. This compares to a pre-COVID average of around 200k/week.

The ongoing sell-off in global interest rates is also starting to pose some headwinds for stock markets. US 10-year Treasury yields flirted with the recent 12-month high of 1.32% overnight, while the yield on 10-year German bunds lifted around 4bps to an 8-month high of -0.34%. Just as the multi-year declines in interest rates were one of the key factors boosting share prices, investors factoring higher future discount rates will reduce some of this support for equities. We’d note though that if yesterday’s FOMC minutes are anything to go by, the outright level of rates is going to remain well below recent averages for years. The Fed reinforced the view that the FOMC will not prematurely reduce policy support given the Fed is still a long way from hitting its labour market and inflation goals.

In terms of NZ yields, Swap rates are seen as continuing to build on the recent trend higher, driven off ASB Economics’ new forecast for the RBNZ’s OCR to lift in August 2022 (around a year earlier than prior forecasts).

Yesterday’s January Aussie jobs numbers continued the trend of global labour markets mostly heading in the right direction. Employment rose by a solid 29.1k in January following a (upwardly revised) 50k increase in December. The unemployment rate dipped to 6.4% and the underemployment rate moved down to 8.1%. Our CBA colleagues expect the good news to keep coming with solid employment growth forecast over 2021 and the unemployment rate to fall further to 5.7% by the end of 2021.

FX update: The softer USD pulled the NZD/USD back up above 0.7200, having fallen to 0.7160 yesterday. We continue to favour a ‘buy of dips’ approach for NZD/USD based on a view that fundamentals will continue to move in support of the NZD this year skewing the balance of risks toward further appreciation.

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