Mark Lister, 2 June 2020

Global equity markets had another very strong week, rising across the board to see most indices finish the month of May well into positive territory. The S&P 500 in the US was up 3.0% last week, while the Stoxx 600 in Europe and the FTSE 100 in the UK rose 1.4% and 3.0%. The Australian market was stronger still, with the ASX 200 posting a weekly gain of 4.7% as the banks staged a rebound.

The local NZX 50 rose 2.1%, ending May 3.3% higher and taking the index within 10% of its February record high. The NZ dollar was mixed, gaining 1.8% against the US dollar last week but finishing little moved against other major currencies. Interest rates rose slightly amidst the more positive sentiment, with the five-year swap rate increasing 12 basis points to 0.35%. We’ve seen term deposit rates (TD) come down sharply in recent days, with the major banks advertising a six-month TD at 1.8%. Once taxed at 33% the yield falls to 1.2%, which doesn’t leave a particularly large buffer against increases in the cost of living.

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Looking to the week ahead, investors will continue monitoring US/China tensions. President Trump said on Friday the US was ending its preferential treatment of Hong Kong, revoking its treatment as a separate customs and travel territory from China. This move came in response to Beijing’s imposition of new national security powers over Hong Kong. Trump stopped short of threatening more tariffs against China. Elsewhere on the global calendar, markets will continue to monitor the reopening of some economies. This includes the easing of lockdown measures in the UK from Monday, and the reopening of Las Vegas casinos (which have been shut since March) on Tuesday in Nevada.

Brexit negotiations will also resume, with discussions currently gridlocked as the deadline for an extension to the transition period approaches. The European Central Bank (ECB) meets on Thursday, with a press conference with President Christine Lagarde to follow. Economists expect the ECB to increase its stimulus package in the wake of this meeting.

The key economic releases in the US this week will be the ISM manufacturing survey on Monday, and the monthly jobs report on Friday. The ISM is expected to improve to 43.7 in May, up from April's 41.5 (the services ISM will be out on Wednesday). The non-farm payrolls report is forecast to reflect a decline of 8 million jobs, and an increase in the unemployment rate from 14.7% in April to a staggering 19.6% in May. As bad as that is, we have seen some minor improvements in the labour during recent weeks. Last week the number of Americans seeking jobless benefits fell for an eighth straight week as some people returned to work, while the total number of continuing claims declined for the first time since the outbreak took hold.

March quarter GDP is out on Wednesday and April retail sales are due Thursday. Locally, the latest global dairy auction will be a highlight of the holiday shortened week, with results released early on Wednesday morning. The headline GDT index rose 1.0% at the last auction, which was the first increase in six weeks. Prices are now 10.8% below where they began the year, and 15.9% down from a year ago. Fonterra recently confirmed that its milk payout forecast for the current season would be $7.10-7.30, the highest in six years. The cooperative also announced an opening forecast range for the 2020/21 season of $5.40 to $6.90 per kg. The midpoint of this is $6.15, a relatively good outcome under the circumstances. However, the wide forecast range reflects significant uncertainty across the global market.