After being gripped by recession fears in recent weeks, markets are trading with a more bullish tone overnight. US equities and commodity prices are higher, the US 10-year rate is back to 3%, while growth-sensitive global currencies including the NZD are stronger. However, the euro remains under pressure, falling to 1.0150 and approaching parity. The release of non-farm payrolls is the main focus of the market in the upcoming session.
Market sentiment has improved over the past 24 hours, with recession fears appearing to ease a bit. The improved sentiment has been attributed, at least in part, to a Bloomberg report that China plans to let local governments sell an additional $220 billion (~1%/GDP) of special bonds in the second half of the year, to fund infrastructure investment, as policymakers try to shore up an economy that has been battered by Covid restrictions. Copper prices, which have fallen in recent months, rebounded 4% overnight while most other industrial commodities are also up, confirming that investors have a less negative outlook on the future. global growth. Similarly, equity markets are up overall with the S&P500 up 1.5%, the NASDAQ up 2.3% while the EuroStoxxx 600 index is up almost 2% for the second consecutive day. . The rebound in risk assets may also simply reflect a recovery from oversold levels.
As Chinese policymakers reportedly consider stepping up stimulus, the threat of further Covid restrictions remains looming. Shanghai reported two more non-quarantine Covid cases yesterday and the (highly contagious) BA.5.2 Omicron sub-variant was detected in Beijing.
Global rates rose for the second day in a row. The US 10-year rate, which hit an intraday low of 2.75% the previous night, rebounded to 3%, while the German 10-year rate jumped 11 basis points to 1.31%. The rise in oil prices (Brent +4%) supported the rise in rates via higher inflation expectations (US 10-year inflation break-even point +4bps). Yield curves have steepened even though, notably, the US 2y10y curve remains inverted, which has historically been a warning signal of a future recession. We believe global rates are likely to remain in a choppy range for now with elevated inflation and hawkish central bank messaging hampering a meaningful rate cut, while lingering recession concerns should limit the upside.
There has been no letting up in the hawkish rhetoric from Fed officials, despite recent weaker activity data. Overnight, Fed Governor Waller reiterated the message from the FOMC Minutes, saying “we need to move to a much more restrictive framework“, adding that he wanted to do it “as fast as possible.” Like most of his colleagues, Waller favors a 75 basis point hike later this month, when he said he was “Most likely ” inclined to rise by 50 basis points at the next meeting in September, although there is a lot of water to flow under the bridges by then. Elsewhere, St. Louis Fed Chairman Bullard reiterated his support for a 75 basis point hike later this month, which the market sees as very likely (85% priced in). Both officials were optimistic that the United States could avoid a real recession (as opposed to a “technical” recession).
Commodity currencies rebounded overnight amid the recovery in risk sentiment and commodity prices. The AUD led the charge, rising around 0.8% in the past 24 hours to return above the 0.68 mark. The AUD may also have benefited from news that Australian and Chinese foreign ministers are planning to meet on the sidelines of the upcoming G20 meeting, offering a chance to improve relations that have been strained in recent years. The CAD and NZD are both up around 0.5%, with the NZD trading this morning around 0.6180.
The GBP was the other key overnight outperformer, with the market apparently viewing Boris Johnson’s inevitable resignation as a positive for the currency. News reports suggest Johnson wants to remain caretaker prime minister until October, with the leadership race timetable due to be announced next week, although MPs are pushing for him to step down early. The GBP is up 0.8% in the past 24 hours and has rallied back above 1.20.
On the other hand, the euro remains under pressure, falling to a new low of 20 years under 1.0150 and approaching parity. The euro is down nearly 2.5% this week alone amid lingering concerns over an energy crisis in the region. There was no letup in gas prices in Europe, with natural gas futures rising another 6% overnight to €183, their highest level since March.
The economic data was second level and did not move the market. Initial jobless claims hit 235,000, continuing their slight upward trend over the past three months, with the four-week moving average hitting its highest level since last December. The US trade deficit was slightly weaker than expected, with a slight upward revision to the Atlanta Fed’s GDPNow estimate for Q2 growth from -2.1% to -1.9% (q/ t, ann’lsd). The market is much more focused on the Nonfarm Payrolls report due tonight, with the consensus looking for a healthy monthly payrolls gain of 265,000 and the unemployment rate stable at an ultra-low 3.6%.
New Zealand rates were higher yesterday, taking their direction from the previous night’s global moves. The 2-year swap rate rebounded by 4bps, to 3.80%, while the 10-year rate only rose by 1bps. The interest rate spread between New Zealand 10-year swaps and those of the US and Australia hit year lows yesterday as market expectations for the RBNZ converge on Fed and RBA expectations.