The two huge bank collapses/rescues on either side of the Atlantic have been stampeded on by stock market bulls. They are much happier about the market now pricing in the prospects of a lower interest rate path for monetary policy going forward. Nowhere has this been more evident than in the US Nasdaq stock index which closed out its best quarter since 2020. The tech-laden market has been buoyed from bets on megacap companies, which has also boosted the broader S&P500 index by 7% over the past three months. Bulls will be targeting the August high from last year at 15,685.

Investors are now convinced that the Fed will not keep raising rates to fight inflation, lifting shares in large growth stocks which are heavily weighted in benchmark indices. Lower interest rates increase the appeal of companies that promise long-term growth. Huge tech giants like Apple and Microsoft are also seen as less exposed to any potential downturn in bank lending if troubles in the regional banking sector continue. We note that the small-cap index in the US, the Russell 2000, has declined in the past two months, and that an equal-weighted S&P500 would also have been in the red. But tighter lending conditions and a weakening housing market are concerning many economists who think the risks of a hard landing are rising.  

Markets believe US rates are very close to peaking with now a 50:50 chance of one more 25bp rate rise. This pricing and general feelgood mood will be put to the test with the release of the US monthly non-farm payrolls data on Friday. A buoyant labour market report is on the cards with surveys still signalling a fast pace of job growth while unemployment benefits remain historically low. A headline print at least above 200k might tip the odds in favour of one more rate hike. Wage growth will also be key with a soft print again indicating a possible “goldilocks” economy which could keep the dollar steady.

There are two major central meetings worth watching this week. Guidance will be the focus for both the RBA and the RBNZ and whether they leave their policy options open. The RBA decision is a tight call with views split on whether the bank pauses or goes again with another 25bps rate rise. Recent data has been subdued and the housing market is expected to take a turn for the worse as mortgage holders get hit with higher reset interest rates. Moving across to New Zealand, markets have fully priced in a 25bp RBNZ hike with a hot job market and still improving business surveys sealing the deal. As with other major central banks, policymakers will be jostling with the question as to whether we are now at the end of the tightening cycle.

Major risk events of the week

03 April 2023, Monday:

-US ISM Manufacturing: This gauge of business activity is forecast to have fallen to 47.5 from 47.7. The February rise was the first in six months although it missed estimates. Easing supply pressures and costs should offer support but the outlook remains challenging. New orders improved though remain low. A PMI reading below 50 indicates contraction in manufacturing, which accounts for 11.3% of the US economy.

04 April 2023, Tuesday:

-RBA Meeting: A 25bp rate hike would take the cash rate to 3.85%. Analysts say the latest CPI monthly indicator showed inflation momentum remains strong and is not slowing as much as the fall in annual inflation would suggest. Economists cite previous data releases supporting a rate rise call. Other analysts say policy is now clearly contractionary so the case for a pause is strong. Markets are siding with a pause so a more hawkish move could push AUD up to its 200-day SMA at 0.6749.

05 April 2023, Wednesday:

-RBNZ Meeting: Markets expect the bank to lift the OCR by 25bps to 5%. Most economists reckon the reserve bank is nearing the point at which it can “watch and wait” as higher interest rates do their work. But for now, it will leave the door open for further hikes. Interest will lie in what the RBNZ signals about future moves. Analysts currently forecast a peak of 5% for this cycle, though risks are skewed higher.

-US ISM Services: This sector indicator is forecast to decline to 54.6 from 55.1 in February. Weather was closer to the seasonal average, so a small pullback is expected. New orders rose to the highest level since late 2021. Prices paid will be watched after they fell to two-year lows last month, but they still remain at historically high levels.

06 April 2023, Thursday:

–Canada Jobs: The economy continues to surprise to the upside with job gains in five of the last six reports beating estimates. The February headline saw 21,800 jobs added, more than the 10,000 forecast. The jobless rate held steady at 5%, below the estimates of 5.1%. Analysts said the acceleration in wage growth will concern the BoC. The CAD has benefitted from the better risk environment and bouncing oil prices. USD/CAD currently trades just above 1.35 with its 50- and 100-day SMAs acting as support.

07 April 2023, Friday:

–US Non-Farm Payrolls: The market median is for a headline print of 240k and unemployment to remain just above historic low of 3.4% at 3.6%. Analysts say there has been a rise in job redundancy announcements. The tightening of credit conditions might also impact the labour market going forward. Wage growth is seen staying benign at 0.3%. A soft report should take the dollar down towards its February, year-to-date lows.