Within the mix of little overall price action, there’s some unexplainable weakness in the NZD following some weird rates activity yesterday; US 10-year Treasury rate has traded a tight 2.49-2.52% range

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By Jason Wong

Market pricing is well contained, as is typical leading up to the US payrolls report tonight.  But within the mix of little overall price action, there’s some unexplainable weakness in the NZD following some weird rates activity yesterday, which we’d put down to flows than fundamental forces.

Newsflow has been fairly light and focus is on the US payrolls report tonight, which sees most markets treading water.  Ahead of that report, US jobless claims unexpectedly fell to a 49-year low for the week ending 30 March, possibly affected by seasonal adjustment factors due to shifting Easter patterns. Still, data were revised lower in the previous week which removed the recent upward trend, and it all suggests that the US labour market remains tight, if not tighter, despite the recent slowdown in growth momentum. The market expects payrolls to recover by 175k after last month’s swoon, keeping the unemployment rate steady at 3.8% and annual hourly earnings at 3.4%.

German factory orders data unexpectedly plunged further in February, to be down 8.4% y/y, the weakest since the GFC.  The details revealed the weakness being driven by foreign orders, although domestic orders continue to fall as well.  We already have timelier PMI data on hand showing an unexpectedly large fall in activity in German manufacturing in March, so the data are consistent with a German industrial sector heading backwards.

The minutes of the last ECB meeting reported some concerns about the side effects of a prolonged period of negative interest rates, including on banks’ profits and financial stability. Furthermore, some Governing Council members initially favoured a longer extension in forward guidance on potential rate hikes “through the first quarter of 2020”, before settling on “through the end of 2019”.  The minutes highlight the dovish tilt the ECB still has and increases speculation that the ECB might soon adopt a tiered system, which would reduce the impact of the negative overnight deposit rate that banks pay on their reserves.

US-China trade talks are said to be entering their final stages and the Chinese delegation will meet Trump later this morning so we might expect some fresh tweets on that soon. Both parties want to reach a deal, with Trump focused on his re-election next year so we’re still optimistic that a deal will be signed.

None of this “news” was particularly market moving.  The USD has made some broadly based gains although these aggregate to a small 0.2% gain for the day on the dollar indices.  The S&P500 is currently flat, while the US 10-year Treasury rate has traded a tight 2.49-2.52% range, continuing to show signs of consolidation.

The NZD is one of the weakest of the majors, down 0.5% from the NZ close to 0.6760, after touching 0.6800 (again) yesterday afternoon.  We don’t see any satisfactory explanation based on fundamentals so put the move down to flow.  Some big corporate deals in the sharemarket have recently been finalised and those might have been a factor.  There was also some apparent flow-driven activity in the rates market yesterday, which saw some chunky moves in rates. The 2-year swap rate traded a 6bps range before ending the day up 2bps at 1.63%. The 10-year swap rate traded an 8bps range before ending up 6bps to 2.26%.  The government curve showed significant steepening, with the 2-year rate up 4bps and the 14-year rate up 12bps.

GBP is the weakest of the majors, down 0.7% to 1.3070 with PM May and Labour’s Corbyn talking, but nothing agreed to yet.  Just before our lunchtime yesterday, UK parliament passed a bill that takes a no-deal Brexit off the table, subject to the approval of the House of Lords, which should be taken as given.  The implication is that Brexiteers in the Conservative party will be forced to choose between backing PM May or face a long period of extension in the EU. With one negative tail-risk permutation off the table, the most likely outcomes are now a very soft version of Brexit or no Brexit at all. Still, the market is not taking this as GBP-positive (yet) while the clock ticks down and much uncertainty remains.


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