Friday saw a complete turnaround in the risk moves from the night before. The US 10-year rate, which hit 1.25% Thursday night, rebounded to 1.36%, while the S & P500 and NASDAQ closed the week at record highs. Market sentiment was boosted by the PBOC’s announcement that it would cut reserve requirements. The NZD rebounded to around 0.70 amid a weaker USD and higher commodity prices. It’s a big week ahead, with the RBNZ MPR and the NZ CPI national highlights.
As announced earlier in the week by the Chinese State Council, the PBOC officially reduced the reserve requirement ratio (RRR) of Chinese banks by 0.5% on Friday, freeing up about 1 billion yen in liquidity. The policy decision came sooner than some analysts had expected and is in fact a general reduction in the RRR, rather than a targeted measure to support certain sectors. The PBOC described the move as an exercise in liquidity management, in the context of upcoming central bank loans maturing, rather than monetary easing, but the market has always interpreted the move as confirmation of a change of direction in the direction of Chinese policy. The PBOC has not conducted its monetary policy as smoothly as central banks in developed markets, and China also does not have an obvious problem with consumer inflation at the moment, with a CPI released just as early as Friday. above 1%, giving the PBOC the political leeway to support growth amid some signs. a slowdown.
Meanwhile, Chinese credit growth for June was much stronger than expected and its highest monthly reading since January, apparently confirming that Chinese policymakers have turned to supporting the economy through easing credit. China’s second-quarter GDP is released on Friday.
While Thursday saw markets worry about a possible slowdown in global growth (with easing talks in China seen by some to validate these concerns) and the spread of the delta variant of Covid-19, Friday saw a complete turnaround, with the reduction in the PBOC’s RRR contributing to a broad risk-based movement across asset classes.
The EuroStoxx 600 equity index rose 1.3% while the S & P500 and NASDAQ both gained around 1%. Cyclical sectors led the rebound in equities, led by commodity producers and financials, the latter also being helped by the steepening of the yield curve, seen as favorable to banks’ net interest margins. The stock prices of big tech companies have largely ignored a Biden executive order that would target an alleged lack of competition in certain industries, including technology. The S & P500 and NASDAQ ended the week at record highs.
Commodities markets were also universally stronger on Friday on expectations that China would support growth. Copper rose more than 2% while Brent crude oil rose 1.4%, reversing most of its declines from the start of the week. Despite the risks associated with the delta variant, which is now the dominant strain of Covid-19 in the United States, we still believe it is reasonable to expect very strong global expansion this year, monetary and fiscal policies. expected to remain extremely expansionary for some time to come.
US Treasury yields also had a big reversal on Friday. The US 10-year rate, which hit a 4.5-month low of 1.25% on Thursday night, rebounded to end the week at 1.36%. The movement was led by the component of inflation expectations (called “breakeven inflation”) which increased by 6 basis points at 10 years, to 2.29%. This leaves the real 10-year rate (i.e. the inflation-adjusted rate) still at ultra-low levels, around -0.95%.
The USD was overall weaker on Friday (BBDXY -0.4%) amid improving risk appetite and US real rates still ultra-low. Despite the pullback, BBDXY remains at the top of its trading range for this year. After dominating the currency rankings on Thursday, safe havens JPY and Swiss franc underperformed on Friday (-0.4% and + 0.1% respectively) while the euro recorded only modest gains (+ 0.25% at 1.1875).
Likewise, commodity currencies reversed some of their early week losses as risk sentiment improved. The AUD, which posted a year-to-date low on Friday afternoon, was up 0.8% to around 0.7490 while the CAD was also up sharply on Friday evening, supported by a stronger than expected Canadian employment report. Analysts interpreted the Canadian jobs report, which recorded +230,000 new jobs in June, as sealing the deal for a further cut by the Bank of Canada at its meeting this week. Yet over the week, commodity currencies lagged (AUD and NZD -0.4%, CAD -1%), reflecting some emerging concerns about the outlook for global growth.
Like the AUD, the NZD hit a new year-to-date low on Friday afternoon, just below 0.6925, but it was one-way traffic past that point since it moved towards 0.70 (+ 0.6%). NZD rebound confirms 0.6920-0.6930 area as key support. The NZD was down for the second week in a row and five of the past six weeks. We still view the NZD as fundamentally undervalued compared to its typical historical engines which show a fair value above 0.73.
In Australia, another 77 cases of Covid-19 were reported yesterday in New South Wales, with the Prime Minister of the State saying she expected daily cases to soon surpass 100, making fear a prolonged lockdown in the city. This implies some downside risk to the economic outlook, although the markets have been little affected so far.
In the domestic interest rate market, swap rates increased slightly (10 years +2 bps to 1.76%) while government bond yields continued to decline (10 years -2 bps to 1.66%) . The yield on New Zealand 10-year bonds fell 16 basis points last week, although there is likely to be some reversal this morning, reflecting movements in global rates on Friday night.
RBNZ kept bond purchases unchanged this week, at $ 200 million, despite clear signs of strong investor demand for New Zealand bonds (as evidenced by the sharp increase in swap spreads last week) . The market will seek advice from the RBNZ on its bond purchases in its monetary policy report on Wednesday.
It’s a big week ahead, both in New Zealand and offshore. The RBNZ MPR is on Wednesday while the CPI is released on Friday, where we are looking for a quarterly increase of 0.7%, bringing the annual rate to 2.7%. The market will also be watching closely for core inflation numbers, which were already around the 2% target midpoint last time around and are surely biased upward. In Australia, our NAB colleagues expect a slightly below consensus increase of 10,000 jobs in June, following the successful 115,000 increase in May. China’s monthly activity indicators and GDP are released on Friday, with a consensus for the latter at + 1% q / q growth in Q2. In the United States, CPI and retail sales are released, President Powell testifies in the Senate and House, and the corporate earnings season begins. Meanwhile, the Bank of Canada is meeting, with the market waiting to cut its bond purchases from $ 3 billion / week to $ 2 billion / week.