Market sentiment continues to evolve with risk appetite turning positive yesterday afternoon, supporting a rally in equity markets and commodity currencies on a 24-hour basis. Still, the recovery remains unconvincing, with US rates barely higher and the predominant safe-haven currency, the yen, performing the best overnight. The NZD and AUD slipped overnight.
Markets remain nervous about the Omicron variant of COVID19 and we remain in an information vacuum until more data is provided on its transmissibility and timeliness, as well as the performance of current vaccines against it. Meanwhile, Fed Chairman Powell faced another session facing lawmakers, but nothing moved the market, following his hawkish comments the night before.
On Omicron, anecdotal evidence so far offers a silver lining that we shouldn’t be too afraid of this mutant variant. The WSJ notes the case of a vaccinated Israeli cardiologist who came into contact with more than 100 people after contracting Omicron, but only transmitted the virus to his unmasked colleague who shared a car, and he did not. has not even passed on to his family. He also notes two vaccinated cases in Hong Kong, which showed mild symptoms and levels of antibodies in blood samples that rose 10-fold within days of discovering their infection. The WHO chief scientist said that “we have yet to determine if there is a loss of protection, but we believe that vaccines will still protect against serious diseases as they have against other variants.”
Major US data released overnight were both in line with market expectations, with the ADP and ISM manufacturing private payrolls increasing 534k to 61.1 in November. The ADP report will make little change to expectations for Friday’s non-farm payroll figure, with the consensus currently standing at 545,000, likely strong enough not to hamper the decision to accelerate the cut. of QE, as suggested by a number of FOMC members, including President Powell and Vice President Clarida.
On ISM data, new orders, production and employment components all posted an increase from October as supply chain metrics eased, although they remained elevated – Supplier delivery times, order books and prices paid have all fallen. The data could suggest the worst is over in terms of supply chain disruptions. The sustainability of this trend will depend on the evolution of the Omicron risk.
S&P futures rose in early afternoon NZ time yesterday and trended higher with the S & P500 opening on a positive note and extending gains as the index was currently up 1½%, recouping much of the previous session’s 1.9% loss. The Euro Stoxx 600 index closed 1.7% higher after yesterday’s 0.9% drop.
After the noticeable flattening of the U.S. Treasuries curve after Powell’s hawkish comment yesterday, there was a bit more flattening, with the 2-year rate rising just over 1bp and the 10-year rate only slightly higher at 1.44%. 10-year breakeven inflation is down 7 basis points to 2.44%, following yesterday’s 3 basis point drop, suggesting some perceived credibility for the Fed’s wrestling benchmarks against inflation.
In forex markets, commodity-linked currencies rallied from yesterday afternoon, but there was no overnight follow-up. Indeed, since the close of the NZ, they are all lower. NZD hit an overnight high just below 0.6870 and has since slipped to 0.6830. The AUD broke through 0.7170, but fell back to 0.7125. A weaker than expected contraction of 1.9% of Australian GDP in the third quarter did not disrupt the currency market. More recent data suggests a decent rebound in the fourth quarter as NSW and Victoria reopened after the closings. The NZD / AUD is slightly higher for the day at 0.9585.
The JPY clearly outperformed overnight, for no apparent reason against a backdrop of a decent rally in equity markets and barely higher global rates. USD / JPY is down to 112.75. After charging towards 78.0 last night, the NZD / JPY steadily fell to 77.0.
Domestic swaps and NZGB curves showed a clear flattening bias yesterday, driven by global forces. The 2-year swap rate rose 5 bps to 2.20% while the 10-year rate fell 3 bps to 2.67%. The 10-year NZGB lost 2 basis points to 2.39%.
In the coming day, second-tier economic releases on the calendar should not disrupt the market. In the United States, initial jobless claims are expected to rebound to 240,000, after problems with seasonal adjustment factors pushed it down to 199,000 the week before, which was the lowest since 1969.