THE WEEK AHEAD: THE OUTCOME OF THE RESERVE BANK OF AUSTRALIA MEETING RELEASED
Mark Lister, 1 March 2021
February ended on a volatile note, with global sharemarkets falling across the board last week as investors were spooked by sharp rises in bond yields.
The US 10-year Treasury yield rose as high as 1.60% (before falling back to 1.41%), the highest in more than a year. At the beginning of the month, it was just 1.10%. Similarly, the domestic five-year swap rate rose from 0.89% a week ago to as high as 1.35% at one point (before falling back slightly), the highest since January 2020.
Turning to equity markets, the S&P 500 in the US was down 2.5% while the local NZX 50 declined by a similar amount. Most markets managed to eke out small gains during February, although the NZX 50 fell 6.9% for the month. Apart from the 13.0% fall we saw last March, that is the worst monthly performance since 2009.
The NZX 50 is now 9.8% below its January peak, while the S&P 500 and the tech-heavy Nasdaq are down 3.1% and 6.4% from their respective highs.
Looking to the week ahead, the key releases in the US will be the ISM index and the monthly jobs report, both of which will cover the month of February. The ISM should be strong, although the jobs report will be more closely monitored, given signs of a slowing labour market recovery during the last few months. Following the moves in interest rates last week, Fed Chair Jerome Powell will also get a lot of attention when he speaks at a Wall Street Journal summit on Thursday.
On the local front, we will digest yet another Auckland lockdown, but there isn’t much else with the reporting season largely complete and a sparse economic calendar (aside from a dairy auction on Wednesday). The only corporate events of note will be the Vista result on Monday, and the listing of My Food Bag on Friday.
There is more happening across the Tasman, with the RBA meeting on Tuesday taking on more importance given recent financial market ructions. We can also look forward to the December quarter GDP report and the latest retail sales figures.
The outcome of the latest Reserve Bank of Australia (RBA) meeting is released on Tuesday afternoon at 4:00pm. Last week's big moves in interest rates have made what would’ve been an otherwise uneventful meeting a key event. As was the case in New Zealand, bond yields in Australia have increased more rapidly than those in the US. This has seen the spread between Australian 10-year Government bonds and their US counterparts rise to the highest levels since 2017. The RBA has already indicated that a key reason for the current quantitative easing (QE) programme is to ensure an unwelcome currency doesn't occur, and one would think the sharper rise in yields is putting that objective at risk.
The results of the latest global dairy trade (GDT) auction will be released early on Wednesday morning. The headline GDT index gained another 3.0% at the last auction, which was the seventh consecutive rise. Whole milk powder, the most important commodity for the local dairy sector, posted a strong gain of 4.3%. The GDT index is now up 22.3% since the end of October and is at its highest level since April 2014. However, it is still 25.6% below the high that prevailed in 2013.
The key economic releases in the US this week will be the ISM manufacturing index, due Monday, and the monthly jobs report, scheduled for Friday. The ISM index is expected to increase marginally from January's 58.7, which should be the ninth consecutive reading above the breakeven 50-level. We will be watching for signs of increasing cost pressures, after the ISM Prices Index registered 82.1 last month, the highest reading since April 2013.