Global equities couldn’t extend the previous Fed-inspired rally into the end of last week with major indices closing lower. Gold hit a fresh record high. Fed speaker remarks brought lower UST yields

Global equities couldn’t extend the previous Fed-inspired rally on Friday night with the S&P closing modestly lower while European stocks made larger declines. The Euro Stoxx index fell 1.5%. There was limited first-tier economic data to provide the market with direction. Global bonds ended the session marginally higher in yield while the dollar was generally firmer against G10 currencies. Gold hit a fresh record high above US$2600 per ounce.

Influential Fed Governor Waller said that favourable inflation data, and not worries about the labour market, was the reason he supported a 50bps rate cut last week. He said, ‘inflation is potentially on a lower path than we expected’ and that he’d likely support 25bps cuts at each of the two remaining Fed policy meetings this year if the economy evolves as he expects.

Fed Governor Michelle Bowman, the only dissenter against the 50bps cut, made a statement outlining her rationale. She said that although there has been meaningful progress on lowering inflation, while core inflation remains around or above 2.5%, she sees risks that the Committee's larger policy action could be interpreted as a premature declaration of victory on the central bank’s price stability mandate.

The market is pricing a further 74bps of Fed easing by December. US treasury yields moved higher initially - 2-year rates reached a session high of 3.64% - before reversing after Waller’s comments on inflation. Yields on 2-year treasuries closed at 3.59%, little changed on the day, while 10-year UST yields ended 3bps higher at 3.74%. The curve continues to steepen – the 2y/10y slope reached 15bps which is a new cycle high. The market looks ahead to 2-year, 5-year and 7-year UST supply this week.

The Bank of Japan (BoJ) left rates unchanged at 0.25% and signalled it is in no hurry to proceed with further tightening. This was in line with expectations and had limited initial market impact. 10-year JGBs closed at 0.83%, unchanged on the day. Data released ahead of the decision showed headline CPI picked up to 3.0% in August while the core measure increased 2.0%.

Governor Kazuo Ueda pushed back on the likelihood of an October rate hike in his accompanying press conference and expressed concern over the market meltdown that followed July’s rate increase. He also said that the ‘upside risk to prices does appear to be easing given the recent yen strength’. The yen weakened after Ueda’s comments.

In the latest in a series of measures aimed at stabilising the property market in China, it was reported that officials are considering relaxing restrictions on non-local buyers of real estate in Beijing and Shanghai. The latest proposed action takes place alongside a push to lower borrowing costs and is set against the backdrop of further weakness in home sales and prices during August.

A gauge of China property stocks extended gains to 8% over the course of last week but the announcement had little impact on the broader market performance. China’s CSI 300 Index has fallen about 7% this year significantly underperforming other major global equity indices.

The US dollar was marginally stronger against most G10 currencies. The yen underperformed falling more than 1% against the dollar in the aftermath the BoJ policy decision. The pound was the only G10 currency that gained against the dollar after UK retail sales grew more than expected in August.

NZD/USD traded down towards 0.6210 in the offshore session before recovering following drop in US yields after Waller’s comments to end little changed. NZD/GBP slipped to 0.4680, the lowest level this month. NZD/JPY extended higher towards 90.00 representing a close to 4% rebound from the low earlier in the week.

Activity in the NZ fixed income was subdued in the local session on Friday in the absence of domestic catalysts. 2-year swaps closed at 3.65, 2bp lower on the day. The curve steepened modestly with 10-year swap rates 1bp higher at 3.78%. The 2y/10y swaps curve closed at +20bps, the steepest level in more than two years. 10-year Government bonds closed 1bp lower at 4.17%.

Australian 10-year government bond futures are close to 3bps higher in yield since the local close on Friday, suggesting a modest upward bias for NZ yields on the open.

NZ trade data for August is released today. Later this evening advance PMIs for Europe and the US are the only economic data of note. Fed speakers will also provide commentary following the FOMC last week. Looking further ahead to the remainder of the week, it is a quiet relatively economic calendar. The Reserve Bank of Australia is unanimously expected to leave rates on hold on Tuesday ahead of August monthly inflation data the following day.