NZD and AUD collapse to new lows for the year
Friday saw widespread risk aversion moves, with stocks and bond yields falling sharply and the NZD and AUD falling to new lows. Sparkling sectors of the market, including tech stocks and bitcoin, have seen big moves. The nonfarm payroll report was mixed, but most analysts don’t think that will stop the Fed from accelerating its pace of decline.
The non-farm payroll report was another mixed bag. Employment growth in November was much weaker than expected, at 210,000 (expected 550,000), despite modest upward revisions, totaling 85,000, from previous months. In contrast, the unemployment rate, which is calculated from a separate household survey, fell from 4.6% to 4.2%, even with an increase in the participation rate. Wage growth was slightly weaker than expected, at 0.3% on the month, although the measure of average hourly earnings may be distorted by changes in the composition of the labor force and the timing of the survey. wages. Released after payroll, the ISM Services index reached a new all-time high.
Looking at month-to-month payroll volatility, the bigger picture is of an unusually tight US job market, as illustrated by record job openings, surveys showing that it has never been more difficult to fill jobs and wage growth at its highest level. from the GFC. In this context, the consensus after the wage bill is that the Fed will always go ahead and announce a faster rate of decline, possibly from $ 15 billion per month to $ 30 billion per month, at its meeting of next week, to give themselves the opportunity to raise rates earlier. in 2022. The market fully assesses a probability of around 90% that the Fed will hike rates by June of next year.
The recent hawkish pivot of the Fed and the emergence of the Omicron variant are among the factors weighing on risk appetite. It was another day of decline for equity markets on Friday, with the S & P500 down 0.85% and the EuroStoxx 600 index down 0.6%. The VIX ended the week above 30, symptomatic of growing uncertainty.
However, the real weak spot was the tech sector, with NASDAQ falling 1.9% amid large drops from chipmaker Nvidia (-4.5%) and Tesla (-6.5%). The prospect of a Fed rate hike next year is seen as a headwind for high-valued tech stocks that have been favored by retail investors. Bitcoin – which some see as another indicator of speculative excess – saw a 20% correction over the weekend, although it recovered to trade just below $ 50,000.
Global rates first rose after wages, before reversing lower as equity weakness spread. The US 10-year rate fell 10 basis points on the session to a 2.5-month low of 1.34%. The flattening of the yield curve remains the dominant trend as investors brace for Fed rate hikes next year. The 2-year rate fell only 2 basis points, with little change in the Fed’s rate hike expectations that day. The US 2yr continues to trade near its recent 18-month high.
The NZD and AUD both posted new year-to-date lows on Friday amid weak equity markets. The AUD fell 1.3% to 0.70 while the NZD lost 0.9% to around 0.6750, its lowest level since November of last year. Safe havens outperformed, with the JPY and Swiss franc both appreciating 0.3% and the EUR 0.1%.
The CAD (-0.3%) outperformed other commodity-linked currencies after an excellent report on the Canadian labor market, which showed an increase of 153,000 jobs and a decline of 0.6 % of the unemployment rate, at 6%. The market has stepped up expectations for the Bank of Canada’s rate hikes, with a rate hike in January now valued at around 66% and five total hikes slated for 2022.
In the UK, MPC member Michael Saunders has hinted that the BoE may not hike rates this month amid the uncertainty surrounding Omicron. Saunders observed that “There might be particular advantages to waiting to see more evidence on its possible effects on public health outcomes and therefore on the economy.With his notable comments as he is considered one of the most hawkish members of the MPC. The market now assesses only a one-in-three chance of a 15 basis point hike by the BoE this month, after being fully valued just two weeks ago. The GBP closed at its lowest level in 12 months, around 1.3235.
There hasn’t been much news on Omicron, with markets awaiting scientific findings on the severity of the variant and the effectiveness of the vaccine. US health expert Fauci told CNN “there does not appear to be a great degree of severity to this”, while warning that it was too early to be definitive. Initial data from a hospital in Pretoria, where Omicron cases have increased, showed hospital patients with Covid were less likely to need oxygen and stayed in hospital for shorter periods of time on average. However, the study’s small sample size (166 admissions and 42 patients in Covid departments) means it’s too early to conclude that Omicron is milder than previous variants.
In addition, the Chinese Evergrande has announced its intention to restructure its offshore debt. The over-leveraged property developer has said he cannot guarantee he will be able to meet a $ 260 million bond, which is likely to trigger a cross-default on his $ 19 billion USD bond. The Guangdong local government sent a team to oversee risk management, effectively taking control of the business. Evergrande’s USD bonds are trading just over 20 cents on the dollar, so markets have already factored in a restructuring / default scenario, and investors generally seem confident that Chinese authorities can prevent the default. does not turn into a systemic risk event. Speaking on Friday, Chinese Premier Li foreshadowed a reduction in reserve ratio requirements, as authorities continue their targeted and gradual easing measures.
In the domestic interest rate market, the key theme – as in offshore markets – remains the flattening of the yield curve. The 2-year swap rate traded up to 5 basis points higher at one point on Friday, before declining, eventually closing down 1 basis point on the day, at 2.25%. The 10-year swap rate fell 5 basis points, with the yield curve between the 2- and 10-year rates hitting an 18-month low of 0.32%. The market rates an aggressive series of rate hikes by the RBNZ over the next two years and then around 35bp of rate cuts over the next three years.
The market will likely focus this week on developments with Omicron. The key data release is Friday night’s US CPI, where the consensus is that headline inflation will hit an almost 40-year high of 6.7% year-on-year and core inflation will hit its highest. level since the early 1990s, at 4.9%. Higher than expected inflation has been a major driver of the Fed’s recent hawkish pivot. The RBA meeting is expected to go off without incident tomorrow, with the key meeting – in which it will decide what to do with QE – scheduled for February. Locally, there are partial indicators ahead of the GDP release next week, where we forecast a 7% drop in GDP growth in the third quarter.