Stocks flat before FOMC minutes, zero covid strategy stays RBNZ hand

Morning Note

European stocks opened higher on Wednesday after a more positive handover from Asia. Wall Street snapped a 5-day win streak to end the day lower by around 0.7%, with the Nasdaq off 0.9%. The FTSE 100 is higher again today after a solid shift on Tuesday left it outperforming peers – helped by BHP’s rally. Gold is facing resistance at the 50-day line around the $1,800 level as the bounce continues, WTI trades up around $67 ahead of the weekly EIA inventory figures after the API reported a draw of a little more than 1m barrels.

UK inflation fell to 2% last month, down from 2.5% in June, leaving the Bank of England some breathing space, though it’s rather messy – this could just be a minor speed bump on the path to 4% as base effects/summer discounting in clothing weighs. Rising wage growth and a labour market shortage may conspire to drive up more persistent inflation trends. Core month-on-month inflation was flat vs +0.3% expected. Sterling was barely moved and trades a little above yesterday’s 3-week low around 1.3745, but still below the 200-day SMA.

One case = national lockdown = impact on monetary policy. The Reserve Bank of New Zealand postponed its first interest rate hike, after the country moved into lockdown following a number of cases of covid-19 were detected, the first such in six months. A policy of zero-covid seems unsustainable in the long run, but the regime is set on this hard-line path. The RBNZ is set to hike still, but if there are ongoing intermittent lockdowns it could be delaying again, though governor Orr said the country is going to face rolling periods of covid disruption and can handle it. NZDUSD spiked to 0.6880 but has pared losses to regain the 0.69 handle.

NZDUSD: lower end of the range – knock enough times? Bearish MACD crossover on the daily here.

Chart showing NZD/USD currency pairing movements on 18th August 2021.

Jay Powell, Fed chair, said the US central bank is in the process of putting away its tools designed for actual emergencies – hints of a taper. He also stressed that for all the doom-mongers out there, it’s not certain that the Delta strain will dent the recovery.

Or will it? A batch of US data offered a soft-ish picture for the economy and could be enough for doves to argue the Fed does not need to rush. Delta seems to be taking some of the shine of consumers in the US as retail sales missed. MoM -1.1% vs 0.2% estimate, retail sales control group -1.0% vs +1.1% last month. Retail sales ex-auto and gas -0.7% vs 1.4% prior. Industrial Production was bit better at +0.9%, vs the expected +0.5%. Manufacturing production +1.4%, vs +0.7% expected and capacity utilization 76.1%, vs expected 75.7%. Minutes from the FOMC’s last meeting are due out tonight, offering more clues about when policymakers expect to exit emergency mode by tapering the $120bn-a-month QE programme. It ought to indicate Clarida’s hawkish shift reflects the committee’s position.

Yesterday we mentioned Michael Burry’s short on ARKK. Cathie Wood went on the offensive, tweeting: “To his credit, Michael Burry made a great call based on fundamentals and recognized the calamity brewing in the housing/mortgage market. I do not believe that he understands the fundamentals that are creating explosive growth and investment opportunities in the innovation space.” ARKK fell again.

Week Ahead: US consumer confidence shaky while rising yields impact markets

Week Ahead

Looking forward to the week ahead we see US consumer confidence on shaky ground, despite more stimulus coming soon. Rising yields will also potentially have big implications for the markets. Elsewhere, New Zealand’s economy looks like its gaining strength ahead of the RBNZ rate statement, while Airbnb leads large caps reporting next week with its first earnings call as a publicly traded company. 

US consumer confidence doesn’t look so confident 

Ahead of the official US consumer confidence figures posted next week, it appears consumer sentiment has fallen in February so far. 

Preliminary data revealed a drop in the University of Michigan’s consumer confidence index from a reading of 79.0 for January to 76.2 in February against a consensus of 80.5-80.8. 

Low income households, i.e. those with an annual income of $75,000 or lower, appear to be driving sentiment lower. Only 23% of households in this grouping said their finances had improved since 2014, and 71% said they had made gains in their income.  

What’s interesting, according to Survey Director Richard Curtain, is that consumer confidence has dropped against the previous month, despite Joe Biden preparing the mother of all stimulus packages. $1.9 trillion in relief is on its way, which will put, at minimum, $1,400 apiece into US consumers’ pockets, plus extra support for small businesses. $900bn was also doled out to lower income households in December 2020. 

Support is on its way, but at the moment, consumer sentiment looks like its in the doldrums. 

Rates & equities react to steepening yields 

As rates have sold off, yields have steepened,  which may have consequences for asset classes like FX, equities, and maybe even crypto currencies.  

Last Tuesday, Treasury yields had their biggest gain in 3 months. 10s rose 9 basis points, reaching the highest since February above 1.3%.  

As our Chief Market Analyst Neil Wilson has previously reported, there are some important factors at play here creating inflationary impetus, notably: 

  • A heavy volume of pro-cyclical fiscal stimulus 
  • Ultra-loose monetary policy 
  • Pent-up demand  
  • A savings glut 

European stocks are sliding as concerns around interest rates feed into investors’ thinking with the speed of the change in absolute yields catching them off guard. UK Inflation rose from 0.6% in December to 0.7% in January, due to rising costs as the cost of furniture and household goods, restaurants and hotels, food, and transport. 

Gold has also weakened on higher yields. 

Essentially, this is one to keep track of, as rising yields as implications across the investment and finance world. 

RBNZ Rate announcement – No change on the Kiwi front 

The Reserve Bank of New Zealand (RBNZ) makes its rate statement next week amidst expectations that no major rate changes are coming. 

New Zealand’s economy has been one of the more resilient in the year of the pandemic. Swift, strong lockdown and border control measures limited damage caused by Covid-19, which has put New Zealand in a better than expected economic position. 

The New Zealand Dollar (NZD) enjoyed a great 2020, making significant strides against the pound, euro, and US dollar, reacting well to a turbulent first half of the year, which included a big sell off 

It’s now expected that no further stimulus is needed for New Zealand. Commentators also believe that negative rates are not going to be implemented by New Zealand’s central bank either. 

Australia New Zealand Banking Group, one of the country’s top lenders, does not expect a rate change by RBNZ, in part due to the strength of the NZD, but also because the country’s labour market is in a good position too. 

New Zealand’s labour rate fell to 4.9% in the last quarter, somewhat unexpectedly, with labour underutilisation in some key sectors falling too. Government stimulus in some areas of the economy is helping cover shortfalls in others, which is a boon for employers, a boon for workers, and a boon for the economy as a whole. Exports have also remained supportive. 

Essentially, the outlook in the short term is still good for New Zealand. Some predict OCR rates will begin rising in 2024. Inflation is predicted to rise to 2.5% by June but may scale back to 0.8% in the following year. Let’s keep an eye on New Zealand, but it may not be wise to expect a massive overhaul in monetary policy at next week’s statement. 

Airbnb’s first earnings as a publicly traded company 

Airbnb went public in December 2020 and will make its first ever earnings call as a publicly traded company on February 25th. 

Of course, any earnings will have to be viewed through the pandemic prism. According to its S1 filing, Airbnb’s gross booking volumes had fallen 39% year-on-year 2020, totalling $18bn, while revenues dropped 32% for a total of $2.5bn in the 9 months up to September 2020. Mandatory lockdowns struck in key economies like the US, EU, and UK in April 2020, which bought personal travel to a halt. 

But Airbnb does have enormous brand recognition, which may be helping its shares and business do better than peers. Its market cap of about $120bn outstrips its rival online holiday rivals like Expedia ($22bn), Tripadvisor ($5bn) and even ($91bn) Listings have stayed relatively stable, for instance, dropping only 2% across the pandemic with 5.6m registered in September 2020 against 5.7m in December 2019. 

Long-term stays (bookings over 28 days) were down only 13% y-o-y in April 2020, traditionally the worst month for hotel bookings, but showed y-o-y growth between May and September of that year. 

A project $3.2 trillion market opportunity may keep investors looking to Airbnb. According to commentators, Airbnb has very strong potential in its three key offerings: 

  • $1.8 trillion – Short-term stays 
  • $210 billion – Long-term stays 
  • $1.4 trillion Experiences 

What is more, Airbnb had 247 million guests in 2019, accounting for 3.8% of the estimated 6.5 billion global paid overnight trips that year. If it can capture just 10% of the potential market, Airbnb could net $340 billion in sales a year. 

This will be an interesting earnings call to say the least. We’ll be able to register the impact of pandemic on Airbnb and see if its fundamentals are strong enough to weather the storm.  

The outlook may be good already. Investor confidence seems high. Airbnb shares soared 200% after it went public, and as of February 15th, they were trading around their record level. 

Major economic data 

Date  Time (GMT)  Currency  Event 
Tue Feb 23  3.00pm  USD  CB Consumer Confidence 
Wed Feb 24  1.00am  NZD  Official Cash Rate 
  1.00am  NZD  RBNZ Monetary Policy Statement 
  1.00am  NZD  RBNZ Rate Statement 
  1.00am  NZD  RBNZ Press Conference 
  3.30pm  USD  US Crude Oil Inventories 
Thu Feb 25  1.30pm  USD  Prelim GDP Q/Q 
  3.30pm  USD  US Natural Gas Inventories 


Key earnings data 

Date  Company  Event 
Mon 22 Feb  Berkshire Hathaway  Q4 2020 Earnings 
  Palo Alto Networks  Q2 2021 Earnings 
Tue 23 Feb  Home Depot  Q4 2020 Earnings 
  Square  Q4 2020 Earnings 
  HSBC  Q4 2020 Earnings 
  Thomson Reuters  Q4 2020 Earnings 
Wed 24 Feb  NVIDIA  Q4 2021 Earnings 
  Lowe’s  Q4 2020 Earnings 
  Royal Bank of Canada  Q1 2021 Earnings 
  Budweiser  Q4 2020 Earnings 
  National Bank of Canada  Q1 2021 Earnings 
  Puma  Q4 2020 Earnings 
Thu 25 Feb  Salesforce  Q4 2021 Earnings 
  Airbnb  Q4 2020 Earnings 
  Vale  Q4 2020 Earnings 
  Toronto-Dominion Bank  Q1 2021 Earnings 
  Moderna  Q4 2020 Earnings 
  Bayer  Q4 2020 Earnings 
  Dell  Q4 2021 Earnings 
  HP  Q1 2021 Earnings 
  Etsy  Q4 2020 Earnings 
  Telefonica  Q4 2020 Earnings 
Fri 26 Feb  Deutsche Telekon  Q4 2020 Earnings 
  BASF  Q4 2020 Earnings 


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