Oil prices fell after reports that Israel wouldn’t target Iran’s crude infrastructure. Lower oil prices have contributed to a pullback in global bond yields. Currency markets generally subdued

The S&P retraced from its all-time high following news that US officials were discussing capping exports of advanced AI chips. Technology stocks also weighed on European markets. Chinese equities declined as investors wait for more details of a stimulus package first announced by Beijing in September. Officials from China’s housing ministry, finance ministry and the Peoples Bank of China will hold a briefing tomorrow to outline measures to support the property sector and bolster growth. Global bond yields declined, and the US dollar is little changed.

Oil prices, which dropped sharply yesterday after the Washington Post reported that Israel wouldn’t target Iran’s crude infrastructure, continued lower overnight. Brent crude fell below US$74 per barrel, down from US$78 earlier this week. Crude prices have been volatile recently, set against the backdrop of an escalating conflict in the Middle East, and concerns about slowing growth in key markets including China. The International Energy Agency forecast that growth in world oil demand will slow sharply this year and next.

UK labour market was mixed. Annual earnings growth, excluding bonuses, declined to a 4.9% annual rate, which was in line with expectations. This compares with 5.1% in the three months to July. The unemployment rate dipped to 4.0% in August from 4.1%. Investors will look to CPI data this evening to fine tune expectations for Bank of England (BOE) monetary policy. There is 22bp of easing priced for the November meeting and a cumulative 37bp by December. There was limited initial market reaction to the data, although the pound is marginally stronger, with NZD/GBP dipping below 0.4650. Gilt yields are lower.

US treasuries have moved lower in yield, led by the long end of the curve, in a bull-flattening adjustment. 2-year yields are little changed at 3.95% with only second-tier economic data and stable Fed rate cut expectations. Fed Governor Waller said yesterday that recent economic data signals policymakers should proceed with more caution on the pace of cuts. 10-year notes retraced from 10-week highs, and dropped 6bp to 4.04%, with the pullback in oil weighing on break even inflation. Yields also declined across European bond markets with German 10-year bunds closing 5bp lower at 2.22%.

Currency markets were generally subdued overnight with limited movement across G10 currencies. The Canadian dollar is little changed despite data headline CPI falling more than expected. Annual CPI fell to 1.6%, the first fall below 2% since 2021, which firmed expectations of a 50bp rate cut next week. The AUD and NZD are marginally softer against the US dollar. NZD/USD briefly traded above 0.6100 but has subsequently retraced and is close to the session lows on our open.

NZ fixed income yields moved lower in the local session yesterday. 2-year swap rates fell 6bp to 3.71% with a largely parallel curve adjustment. There wasn’t an obvious catalyst for the move but the ~20bp move higher in October likely attracted fresh receiving interest ahead of key NZ CPI data. NZ swap rates outperformed on a cross-market basis against Australia. The government curve bull steepened - 10Y NZGB underperformed relative to shorter maturities but still closed 3bp lower at 4.42%

Australian 10-year government bond futures are ~4bp lower in yield terms since the local close yesterday points towards a downward bias for NZ yields on the open.

The domestic focus will be on Q3 CPI data today with inflation likely to return within the BNZ’s target band for the first time since Q1 2021. Our forecast for the annual headline rate is 2.3%, which aligns with the RBNZ’s projection, from the August Monetary Policy Statement. We expect non-tradeables annual inflation will ease to 5.1%, from 5.4% in Q2, which would also match RBNZ expectations. There will also be a focus on the various core measures.

UK headline CPI is expected to retrace back to a 1.9% annual rate in September from 2.2%. Core and services prices will remain elevated relative to the headline but are also likely to moderate. The data should support a November cut from the BOE. However, the central bank will need to see better news on wages and inflation over the next couple of prints to support another cut in December.