US equities have fallen again overnight; US Treasury yields declined slightly; USD is mixed overnight; NZD one of the stronger performing currencies; NZ swaps curve saw a notable flattening yesterday

By Nick Smyth

US equities have fallen again overnight, and this has caused US Treasury yields to decline slightly.  President Trump announced he was going to impose tariffs on steel and aluminium imports, overshadowing a very strong ISM Manufacturing Survey.  Meanwhile, there was a slightly more dovish tone to Fed Chair Powell’s testimony to the Senate.  The USD is mixed overnight, with the NZD one of the stronger performing currencies.  

After falling sharply into the New York close yesterday, US equities are again weaker today.  The S&P500 is over 1% lower and at two week lows.  US President Trump said he was going to impose a 25% tariff on US imports of steel and a 10% tariff on aluminium, which may have weighed on equity markets.  Presidents Bush and Obama also imposed tariffs on imported steel during their terms,  although Obama targeted Chinese imports specifically, and Bush excluded Canada (the US’s largest foreign supplier of steel) and Mexico.  A ‘trade war’ is an obvious risk to the global growth outlook, although the announcement could be seen as an attempt by the President to appease some of his core group of supporters ahead of the US mid-term elections this year.  It’s definitely one to watch. 

Fed Chair Powell testified in front of the Senate overnight and struck a slightly more dovish tone than two days ago.  While reiterating his intention to proceed gradually with rate hikes, he noted “there is no evidence the economy is overheating” adding he expected “that some continued strengthening in the labor market can take place without causing inflation.” Powell said he didn’t see “any strong evidence yet of a decisive move up in wages.”  The US non-farm payrolls release next Friday, and in particular the wages number, will likely be decisive in setting expectations for the Fed ‘dots’ at the March meeting. 

Meanwhile, New York Fed President Dudley said his confidence in the US economy had grown stronger but “whether that necessitates a faster pace of tightening, I think that remains to be seen.”  He did say though that he would still class four hikes this year as “gradual”. 

The US 10 year Treasury yield has fallen 3bps to 2.83%.  The ISM Manufacturing Survey initially boosted US yields a few basis points, with the index hitting its highest level since 2004 and suggestive of very strong growth in the manufacturing sector.  Additionally, all the key subcomponents of the Survey were strong with the ‘prices paid’ index rising to its highest level since 2011 and, encouragingly ahead of payrolls, the employment index also rising to near mutli-year highs.  But the fall in equity markets over the past hour has caused US Treasury yields to decline to near the day’s lows. 

The USD was mixed overnight, rising against the yen and the Canadian dollar (the latter probably affected by the Trump’s comments on applying tariffs to steel imports).  The USD has fallen slightly against the EUR and the NZD. 

The NZD is the second best performing currency the past 24 hours.  Having reached a low of 0.7186 late yesterday afternoon, the NZD bounced to as high as 0.7254 a few hours ago, although it has since eased back to 0.7230.  The NZDAUD has also rebounded to 0.9350, near to its recent highs.  The AUD reacted negatively to the Australian capex report released yesterday, which NAB economists described as a mixed bag.   

The NZ swaps curve saw a notable flattening yesterday, with the 2 year rate rising slightly but the 10 year rate falling nearly 4bps. 


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