Global equities advanced into the end of last week. The S&P closed more than 1% higher providing a contrast with previous trading sessions where weak earnings from tech companies contributed to the largest drawdown since April. European equities also registered solid gains - the Euro Stoxx closed 1% higher. Market sentiment was underpinned by US inflation data, which was in line with consensus expectations and supports the case for the Fed easing cycle to begin in September. US treasuries moved lower in yield and currency markets were subdued.
US real consumption rose by 0.2% in June, slightly weaker than the 0.3% consensus, but there were upward revisions to previous months. Consumer spending increased 2.3% in Q2, which was a pickup from 1.5% in Q1, but well below the 3.2% average from the second half of last year. Consumption faces headwinds in coming quarters from weaker income growth and an expected gradual increase in the savings rate.
The PCE price deflator, which is the Fed’s preferred inflation gauge, was broadly in line with expectations. The core deflator rose 0.2% in June which was in line with the consensus forecast. This took the annual rate to 2.6%, modestly above expectations for a 2.5% increase, which was attributable to revisions. The core services ex-housing figure rose 0.2% in June, well below the 0.4% monthly average across the first half of the year.
University of Michigan consumer sentiment fell to the lowest level in eight months, albeit in line with consensus estimates. The final reading fell to 66.4 in July, down from 68.2 in June, and the lowest level since last November. 5–10-year inflation expectations edged up to 3.0%. Medium term inflation expectations have been oscillating in a 2.8%-3.2% range over the past three years.
The PCE data is unlikely to dissuade the Fed from cutting rates in September, which is fully discounted by the market, and is expected to be signalled this week at the FOMC. The market is pricing 68bps of cuts by December, marginally higher in response to the data, but less easing compared with the low point in the S&P last week.
A rally in US fixed income was supported by the combination of weakening consumption and benign inflation. US treasuries moved lower in yield in a largely parallel curve adjustment contrasting with the recent curve steepening trend. 2-year treasury yields fell 5bps to 4.38%, the lowest level since the beginning of February. 10-year yields closed at 4.19%, still ~5bps above the July lows. In Europe, 10-year bund yields dipped 1bp to 2.40%.
After a week of large moves in currency markets, the dollar was stable into the close with G10 currencies confined to narrow ranges overall. USD/CAD traded back towards the highest level for the year aligned with the fall in oil prices. WTI crude prices retested six-week lows near US$76 per barrel. After the relentless decline in previous sessions, NZD/USD stabilised above 0.5880 and the NZD was unchanged on the major cross rates.
NZ fixed interest markets continued to move lower in yield in the local session on Friday. 2-year swap rates closed down 2bps at 4.19%. After the recent steepening trend, the curve flattened with 10-year swap rates falling 6bps to 4.15%. Australian 10-year government bond futures are 2bps lower in yield since the local close, suggesting a modest downward bias for NZ yields on the open.
NZ filled jobs is the only economic data of note today, ahead of what is a busy international calendar, headlined by the July FOMC, US labour market data and manufacturing ISM. In addition, the Bank of Japan has its monetary policy meeting while Q2 GDP and preliminary CPI data for July are released in the Eurozone.
[chart;daily exchange rates]
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