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Commodity currencies under-perform

In a quiet week, US equities are flat and US 10-year Treasury yields are tracking sideway, says Jason Wong at BNZ Markets. Commodity currencies and GBP have underperformed, with the NZ dollar pushing down to 0.7010.

I“It has been another uneventful day in financial markets. For a second day running, the S&P500 is trading flat, with little response to more details on plans to raise corporate tax – US Treasury Secretary Yellen outlined details of the proposed changes that will help pay for Biden’s $2.25 trillion infrastructure and other spending package.

 “Alongside the rise in the US corporate tax rate from 21% to 28%, a proposed 15% minimum tax would be imposed on both foreign and domestic earnings, boosting tax paid by removing the incentive for companies to shift investments overseas.

“However, the plan has been softened from the one Biden campaigned on, with the minimum tax only applying for companies with income exceeding $2 billion (previously $100 million) and some tax credits would also apply, meaning that just 45 companies would be liable for the tax – “the most aggressive tax avoiders”, according to the US Treasury.

“There is no guarantee that the tax-and-spend plan passes, with some Democrats opposing the plan as it stands. West Virginia Senator Manchin has said he opposes a corporate tax rate above 25% and earlier in the week he said he knew of 6 or 7 Democrats who shared that sentiment.

“The cloud over AstraZeneca’s vaccine got a little darker, after the UK’s medicine regulator advised people under 30 should be given an alternative vaccine if available. The equivalent EU regulator found a “strong association” with blood clots. The blood clots are very rare and governments insist that the vaccine is safe and immunisation campaigns will remain on track. As the Johnson and Johnson vaccine uses the same technology, regulators will be keeping a close eye on any possible side effects from that vaccine.

“On the economic front, final PMI data for March were revised higher for the euro area – the composite being revised almost a full point higher to 53.2. The US trade deficit blew out to a record $71.1b in February and compares to the $38b reported in February 2020, a massive deterioration over the past twelve months. The data provides some fodder to the “twin deficits” crowd who see the combination of a large fiscal and current account deficit as toxic for the US bond market and USD, but there was little market reaction. This is a slow-burning risk for the pricing of US assets.

“FOMC minutes from the March meeting were released and didn’t seem to offer anything new. Policy makers still agreed that the economy was far from their long-run goals and “the path ahead remained highly uncertain.” They also saw “considerable risks to the outlook” from the pandemic.

“Echoing Powell’s comments that the Fed would be backward looking with its policy response, basing policy on actual outcomes rather than projections, the participants noted ‘the path of the federal funds rate and the balance sheet depend on actual progress toward reaching the Committee’s maximum-employment and inflation goals.’

“The US 10-year Treasury yield has tracked sideways within a range of 1.63-1.67%, currently 1.65%, the same level 24 hours ago.

“Currency movements have been mixed. Commodity currencies and GBP are on the soft side of the ledger, while EUR has kept pace with a slightly stronger USD. GBP is down 0.6% to 1.3740, now well down from the 1.39 handle some 36 hours ago – its significant underperformance over that timeframe still remains somewhat of a mystery, although the AstraZeneca vaccine news won’t be helping. EUR broke up through 1.19, but has settled back down to 1.1870.

“Against a backdrop of a stronger USD, the NZD has trended lower overnight and is near its low for the day around 0.7010. The AUD shows a similar profile and is down to just over the 0.76 mark. NZD/AUD is tracking sideways just above the 0.92 mark.

“Yesterday the domestic rates market saw lower long-term rates, in line with the move lower in US Treasury rates the previous night. The 10-year NZGB and swap rates both fell 4bps to 1.75% and 1.86% respectively. The short-end of the curve remained underpinned by expectations of no change in monetary policy. We don’t expect any fireworks from the RBNZ’s Monetary Policy Review next week.

“In the day ahead the flash estimates from the ANZ business outlook survey are released, still expected to show strong inflationary pressure alongside middling activity indicators. Tonight, US Fed Chair Powell will be on the wires, contributing to a panel discussion on the global economy at the IMF meetings.”

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