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US equity indices were little changed on Friday after a strong performance over the week which saw the S&P gain more than 2% and reach the highest level in more than a year. Equities in Europe and Asia also posted strong gains for the week and global credit markets are trading close to the tights in spread terms for 2023. A ‘soft-landing’ narrative for the US economy is gaining momentum amid signs of cooling inflation, with producer and consumer prices data having fallen more than expected in June. US Treasury yields are higher and the US Dollar gained following strong consumer sentiment data.
The University of Michigan’s consumer sentiment index easily beat expectations rising to 72.6 from 64.4 in June. The equity market rally and pullback in gas prices is supporting consumer confidence, which reached the highest level in almost 2 years, although the relationship with consumption is not strong. Within the report, five-to-10-year inflation expectations increased to 3.1%, which corresponds with multiple highs over the past 18 months and will be noted by the more hawkish leaning officials at the US Federal Reserve.
Futures market continue to see close to a 90% chance of a 25bps hike at the July FOMC. The implied peak fed funds rate retraced following the inflation data last week with an approximately one third chance of further 25bps hike priced. However, the larger adjustment has been the increased number of rate cuts priced for 2024.
After a week-long move lower, US treasury yields rebounded sharply on Friday following the consumer sentiment data. 2-year yields, which fell to 4.6% in the aftermath of softer than expected consumer and producer inflation data added 13bps to 4.76%. The curve flattened with 10-year yields rising 7bps to 3.83%. In addition to the data, some of the weakness in Treasuries may be attributed to the market executing hedges ahead of heavy bank-led corporate supply anticipated for this week. Consensus expectations are for issuance volumes near US$25 billion.
In the absence of major economic releases, European bond markets moved higher in yield. 10-year bunds were 4bps higher at 2.50% and 10-year Gilts increased 2bps to 4.43%.
After steady losses throughout the week, which saw the US Dollar Index fall more than 2%, the Dollar stabilised on Friday gaining support from higher treasury yields and some technical indicators which suggest the currency is oversold and may need to consolidate in the near term.
NZD/USD retreated from 5-month highs above 0.6400 reached in the Asian session on Friday slipping back to 0.6370. NZD outperformed relative to AUD with NZD/AUD closing near the weekly highs at 0.9320.
NZ debt markets were closed on Friday for a public holiday. Australian 3 and 10-year bond futures are close to 5bps lower in yield terms since the NZ close on Thursday. It was announced on Friday that Reserve Bank of Australia (RBA) Deputy Governor Bullock will be the next Governor effective from 18 September.
NZ Services PMI is the only domestic data of note today. The manufacturing PMI fell to 47.5 on Thursday, which was the fourth consecutive month below 50 and is the longest period of sustained weakness since the economy was emerging from the global financial crisis.
China releases Q2 GDP and monthly activity indicators covering fixed asset investment, industrial production and retail sales today amid concerns about the strength of the economic recovery. There is speculation that the People’s Bank of China (PBOC) will add further stimulus after the surprise 10bps rate cut in June although any meaningful measures may not take place till after the end-July Politburo meeting. All surveyed economists anticipate the PBOC will keep the rate on its one-year policy loans unchanged at 2.65% today.
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