US equity markets are little changed with the S&P consolidating near record highs. There was limited lasting impact from higher than expected US CPI data. Global bond yields were little changed overall, and major currencies were mixed against the US dollar. Oil prices gained with Brent crude trading back to US$79 per barrel. Chinese equities remain volatile, and posted strong gains yesterday, as investors look ahead to the weekend briefing on fiscal policy by officials from the Ministry of Finance.
US CPI was higher than expected, representing a pause in recent progress towards moderating price pressures, but remains benign overall. Core inflation increased 0.3% in September, above consensus estimates for a 0.2% rise. This took the annual rate to 3.3%, also above the 3.2% consensus, and level from August. However, the pick-up in the core measure was driven by components that are often volatile – airfares and auto insurance - and do not influence the core PCE deflator.
US initial jobless claims totalled 258k representing a sharp increase from the previous week. That was the highest level since August 2023 and was above consensus expectations of 230k. However, the increase can mostly be attributed to the disruption caused by Hurricane Helene and strikes at Boeing.
Commentary by Fed officials generally presented a consistent tone about the need for measured rate cuts. New York Fed President Williams said policy makers should reduce rates to a more neutral level ‘over time’ now that risks to the Fed’s inflation and employment objectives are better balanced. However, Atlanta Fed President Bostic did note he was comfortable to ‘skip a meeting’ if data backed that. The market is pricing around 20bps of easing for November, and a cumulative 43bps by December, which broadly aligns with the policy makers’ projections from the September FOMC.
After an initial burst of volatility around the CPI data, 2-year treasury yields are little changed at 4.0%. The curve steepened at the margin with 10-year yields increasing 3bps to 4.10%, which is the highest level since August. The US$22 billion 30-year auction attracted strong demand and cleared 1.5bps though the prevailing market level with the recent back up in yield attracting investors.
The US dollar was generally firmer against G10 currencies though the yen and Swiss franc outperformed. The dollar index is 0.2% higher, extending its gains since the reversal at the beginning of the month. The firmer US dollar contributed to a modest NZD/USD pullback in offshore trade. The NZD is little changed on the major crosses, except for NZD/JPY, which has traded back towards 90.40.
NZ fixed income yield ended the session higher in yield in the local session yesterday. 2-year swap rates increased 2bps to 3.67%. The 2y/10 swaps curve steepened to a fresh cycle high above 36bps with 10-year rates increasing 6bps to 4.03%. 10-year government bond yields increased 6bps to 4.36%.
There was NZ$1.0 billion of bids for the NZ$500 million of nominal bonds offered in the weekly government bond tender. The larger volume lines – May-28 and May-34 - both had ~2bps tails. Government bonds have outperformed over the past week relative to swaps and on a cross-market basis which may have crimped demand.
Australian 10-year government bond futures are 3bps higher in yield terms since the local close yesterday which suggests a modest upward bias for NZ yields on the open.
The NZ manufacturing PMI for September is released today. The index has been in contractionary territory for eighteen consecutive months and improved marginally to 45.8 in August. Inflation partials for September will allow some finetuning of CPI forecasts ahead of Q3 data next week.
US PPI data in conjunction with today’s CPI data, will provide inputs for the core PCE deflator, ahead of its release at the end of the month. US consumer sentiment and Canadian labour market data will also be of interest.
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