Todays podcast

Overview Nervous

• US returns from the long weekend in a cautious mood
• US equities on the back foot with defensive Mega-Tech outperforming
• UST yield lead move up in core yields. Supply and ECB factors at play
• USD extends recovery amid cautious mood in the air
• AUD sub 74c, NZD sub 71c
• Coming Up: JOLT, Fed Beige Book, BoC plus Fed Williams

I get a little bit nervous around you
Get a little bit stressed out when I think about you – Shawn Mendes

US investors have returned from the long weekend in a cautious mood. US and EU equities are broadly weaker with big tech outperforming, helping the NASDAQ stay on the green. Core yields are also higher with supply and ECB meeting on Thursday factors at play. The USD has extended its post payrolls recovery with CAD, AUD and NZD at the bottom of the G10 board.

The S&P 500 has ended the day down 0.34% while the Dow is -0.76%. Industrials and Utilities are the big underperforming sectors while communication and IT are up on the day. Indeed, big tech companies, FANG and Friends, are the notable outperformers ( NYSE FANG+ index is up 1.6%) helping the NASDAQ index close in the green, +0.07%. Meanwhile European equities also closed broadly weaker with the Stoxx 600 down 0.5% as investors begin to consider potential implications from the ECB meeting on Thursday.

There has not been a clear catalyst for the change in mood . Headlines about rising infection in US hotspots have probably not helped while the end of unemployment benefits for millions of Americans is another subject in the media. Overall, it just seems investors are taking some time to ponder the implications from the softer than expected payrolls number on Friday. Yesterday Goldman Sachs downgraded US growth to 5.7% in 2021 from 6% in August amid signs American consumers are likely to spend less due to the Delta variant’s emergence, fading fiscal support and a switch from demand for goods to services.

Core yields have also moved up overnight with Supply and the ECB meeting on Thursday likely factors at play. 10y UST yields are up 4 bps to 1.37%, after trading to on overnight high of 1.38%. The US Treasury is planning to issue $120bn of bonds this week with the first tranche last night meeting decent demand. The 3y Note auction of $58b drew strong demand at a yield just below the prevailing market rate. 10-year and 30-year auctions are scheduled for the next two days. Core yield in Europe also rose overnight, 10y Bunds and 10y Gilts rose 4bps to while Italian BTPS gained 6.4bps to -0.322%, 0.737% and 1.24% respectively. The move came on the back of Spain selling EU5b of debut green bonds, Austria offering 10-and 15-year notes and the UK. auctioning 4- and 50-year Gilts. Investors are wary of the  ECB meeting on Thursday anticipating a potential trim to the PEPP bond buying pace.

Risk aversion in the air alongside the move up in UST yields have helped the USD extend its post payrolls recovery. The BBDXY and DXY indices are up 0.48% and 0.35% respectively and the USD is stronger across the board. Ahead of tonight BoC policy meeting (more below), CAD is the notable G10 underperformer, down 0.85% as the market anticipates a dovish BoC narrative. Move lower in oil prices, down 1%, has not helped the loonie either.

The AUD is down 0.65% and now trades at 0.7365, partly reflecting broad USD strength although yesterday’s RBA dovish taper has also played its part.   As expected by NAB, yesterday the RBA stuck to its plan to purchase government securities at the reduced rate of $4 billion a week.The Bank also said it will continue the purchases at this rate until at least mid-February 2022 (so longer review period to February 2022, as opposed to November previously). The RBA is still expecting a strong rebound in 2022, noting “This setback to the economic expansion is expected to be only temporary. The Delta outbreak is expected to delay, but not derail, the recovery.

Global forces have dragged the NZD lower, going just below 0.71 and currently around that mark . Indeed, 71c continues to prove a tough nut to crack for the kiwi. NZD underperformance highlights the influence of global forces with the pair ignoring a strong GDT dairy auction overnight. My BNZ colleague, Jason Wong, noted the price index gained 4% with all products for sale contributing. Whole milk powder rose by 3.3%, skim milk powder rose by 7.3% and both butter and cheddar were up over 3½%. The NZX future for the FY2022 milk price has been steadily rising over the past month, from $7.65 to just over $8 and the overnight auction supports an $8 payout. The recovery in dairy prices provides more fuel for NZ’s record-breaking run in its terms of trade, a supportive factor for NZ farm incomes and the NZD over the medium-term.

In other news, Germany’s ZEW Institute’s analyst/investor survey for September saw a slight improvement in current conditions from 29.3 in Aug to 31.9 – a post pandemic high, but not quite as high as expected (34). Once again however, the forward-looking expectations index slipped – this time to 26.5 from 40.4 and to below the forecats of  30.3. This measure peaked at 84.4 back in May and though it has been sliding since it remains above pre-pandemic highs (just).

Finally, Bitcoin has been stealing some headlines, after falling as much as 17% overnight , after “Bitcoin Day” – the day El Salvador became the first nation to adopt it as legal tender. The app in El Salvador crashed for a few hours which didn’t help confidence. BTC has since recovered a little, now down “only” 10% to just under $47k.

Coming Up

• We have a quiet day of data releases with Japan’s July current account balance and final Q2 GDP reading the highlights during our time zone (0.4%qoq vs 0.3% prev.). Then, tonight the US gets JOLTS Job Openings (10000k exp. vs 10073k), Fed Beige Book and Consumer credit data.
• The Bank of Canada (BoC) has a Policy Meeting while RBA Debelle (Update on Global FX Code of Conduct) and Fed Williams are on speaking duties. Fed Williams is scheduled to discuss the US economic outlook in a virtual event hosted by St. Lawrence University.
• The BoC is expected to stand pat following Canada’s unexpected Q2 GDP contraction and signs the economy has not yet properly rebounded in Q3. Canada’s reopening strategy and high level of vaccination rate suggest the economy should find itself on a stronger footing in Q4, allowing the Bank to begin its final tapering step before it looks to start a reinvestment phase of its bond holdings.

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