Global equity markets are sinking deeper into the red, the US yield curve flattens further and the USD has weakened overnight, reversing some of its post-Fed gains yesterday; NZD is higher in overnight trading but still 1% down since this time yesterday

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By Jason Wong

Global equity markets are sinking deeper into the red, the US yield curve flattens further and the USD has weakened overnight, reversing some of its post-Fed gains yesterday.  This leaves the NZD higher in overnight trading but still 1% down since this time yesterday.

There has been plenty of newsflow over the past 24 hours, much of it bad.  After we went to press yesterday, the Fed delivered on the expected rate hike but the tone of the statement wasn’t as dovish as the market had hoped for.  The Fed signalled “some” further gradual increases in the Fed Funds rate and Chair Powell reiterated that the rundown of the Fed’s balance sheet was on auto-pilot.  The Fed still sees the US economy activity as “rising at a strong rate” and gave a token nod to the implications of global economic and financial developments.

The market’s reaction is consistent with the belief that the Fed might be making a policy mistake, with the yield curve flattening further and, after an initial rise, the USD has fallen back.  The US 10-year rate has fallen to as low as 2.75% and now trades at 2.77%, showing some signs of consolidation, and down about 5bps from the pre-FOMC level. The closely watched 2s10s yield curve slipped just below 10bps.  In economic news, the Bloomberg Consumer Comfort Index’s monthly expectations gauge fell to a one-year low as more respondents said the economy is getting worse. Meanwhile, the weekly comfort measure declined to a three-month low, driven by weaker sentiment on the economy. We’d add that the chunky fall in US equities is also likely damaging consumer confidence.  The Philly Fed’s business activity index dropped to its lowest level in more than two-years, following the weaker Empire index earlier in the week which also fell to a fresh low.

In the latest on US-China trade war developments, the US accused two Chinese nationals of coordinating with state security officials on a decade-long campaign against dozens of companies in the US and abroad to steal intellectual property and other data.   The WSJ reported that the Trump administration will also formally accuse China of violating a 2015 bilateral agreement under which both countries vowed to not engage in state-sponsored hacking for economic gain.

The possibility of a US government shutdown at the end of the week lies in the hands of President Trump who is hardening his demand for funding a border wall and will shortly hold a meeting with House Republicans.

Oil prices just keep on falling, which has seen WTI crude fall below $46 and Brent below $55. OPEC and its allies announced they would give clarity on supply cuts on Friday but the WSJ reports that the demand side of the crude equation is starting to flash red – some analysts say oil demand next year could grow at its slowest pace in eight years.

Against that backdrop, the S&P500 is currently down 1.3%, taking its cumulative fall this month to over 10%.  The fall has been led by economically sensitive sectors and energy.  Against a backdrop of falling equity and oil prices it is surprisingly that US Treasury rates haven’t fallen overnight.  The charts suggest a support level for the 10 year rate around the low 2.70s.

The US is lower overnight against the majors apart from CAD, weighed down by lower oil prices, while the AUD has also under-performed, with its terms of trade also weakened by lower oil prices, with LNG prices linked to crude oil benchmarks.  The AUD dropped below 0.71 and currently sits just above that level.

The NZD trades this morning at 0.6775, up 0.5% from the NZ close, but still about 1% lower from this time yesterday.  Q3 GDP figures were underwhelming, suggesting weaker growth momentum, even if historical revisions meant that the level of activity was stronger than expected.  One of our banking competitors called for a series of RBNZ rate cuts from November next year, which added to the prevailing downside pressure in the rates market.  The 2-year swap rate closed down 7bps to 1.98%, the 5-year rate fell 9bps to 2.23% and the 10-year rate fell by 8bps to 2.66%, the longer end rates reaching fresh multi-year lows.  The OIS curve now prices in sub-OCR rates from February next year, with a rising chance of a rate cut through the year.  The recent RBNZ proposal to significantly raise capital requirements for NZ banks directionally points to a lower OCR to offset the likely upward pressure on lending rates that would arise from this policy.

There is plenty of other news to report, with three other central banks having policy meetings.

The BoJ left monetary policy unchanged even as it looks increasingly unlikely that the government will meet its inflation target. Governor Kuroda said that the BoJ has more tools for adding stimulus if needed – we’d beg to differ – and he added that it’s no problem if government bond yields fall into negative territory, so long as the move reflects economic fundamentals and yields remain within the BOJ’s target range.  USD/JPY is down 1.2% to around 111, largely driven by weaker risk appetite, while NZD/JPY is down to 75.25.

The Bank of England kept rates on hold, as it awaits greater clarity on Brexit.  A smooth Brexit deal would open the door for a rate hike – not currently priced in – with the Bank signalling “an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a limited extent, would be appropriate”.  And a bad exit could open the door for a rate cut, with the Bank signalling a monetary policy response “in either direction” depending on the outcome. Against a backdrop of a softer USD, both EUR and GBP are stronger, up to 1.1460 and 1.2670 respectively, and the NZD weaker on these crosses.

Finally, Sweden’s Riksbank hiked its policy rate for the first time in seven years, from -0.50% to -0.25%, only half expected by the market as the first policy move had previously been guided towards either December or February. The Riksbank said that the next hike will probably happen in the second half of next year.  SEK has been the strongest of the majors.

The economic calendar ahead is heavy, with the key releases being US durable goods orders and the PCE deflators tonight.

BNZ Markets Today will not be published over the Christmas/New Year period. Regular publication will resume sometime between 8-14th January depending on weather and market conditions. We thank you for your readership over the year and hope you have a good break during the festive season.


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