The US economy expanded underpinned by strong consumer spending. UK gilts were volatile as UK chancellor delivered her debut budget and the market digested plans to ramp up borrowing

US equity markets struggled to gain traction, as investors remained focused on company earnings including technology companies Microsoft and Meta and digested robust US GDP data. The S&P is modestly higher in afternoon trading while European stocks declined despite Euro-area growth beating expectations. The Euro Stoxx index closed 1.2% lower. US treasuries moved modestly higher in yield and the US dollar index declined.

The US economy expanded at a 2.8% annual rate in the September quarter, underpinned by strong consumer spending, which grew by 3.7% and is the fastest pace in over a year. The core PCE deflator increased 2.2% in Q3, marginally above expectations, but still representing a significant slowing from the 3.3% average in the first half of 2024. This implies a 0.3% increase in the core PCE deflator for September, which is in line with previous consensus estimates.

ADP reported that private sector employment increased 233k in October, which was higher than expectations, despite disruptions from several hurricanes. Although the data was strong, the ADP payrolls data has not had a strong relationship with actual payrolls in recent months.

The Eurozone economy expanded by 0.4% in the third quarter which was above the 0.2% consensus estimates and the ECB’s staff forecasts. In the regional data, the German economy grew by 0.2% and avoided falling into a technical recession.

There was little change in market pricing for easing by the Federal reserve after the data, with a 25bp cut all but priced for the November meeting, and 43bp of rate cuts implied by the end of the year. US treasuries trade was choppy, with an initial move higher in response to the ADP data, ultimately sustained. 2-year yields are 4bp higher at 4.14% while 10-year notes are little changed at 4.25%.

UK gilts were volatile as UK chancellor Rachel Reeves delivered her debut budget which included GBP 40 billion of tax increases. Gilt yields fell initially but reversed higher as the market digested plans to ramp up borrowing. 10-year yields were 20bp above the intra-day low at one point before settling at 4.35%.

In currency markets, the US dollar was broadly weaker, with the euro outperforming amongst the majors while the yen was little changed. The AUD and NZD are both close to 0.5% higher overnight. NZD/USD briefly traded above 0.6000 but has faded into the local open. The NZD gained against the yen and pound. NZD/GBP rebounded above 0.4600 having reached fresh multi-week lows yesterday.

NZ fixed income yields were little changed in the local session yesterday in the absence of domestic data or other catalysts. Australian Q3 CPI broadly matched expectations and provided little impetus for regional rates markets. 2-year NZ swap rates closed 2bp lower at 3.62% while 10-year rates closed at 4.14%, also 2bp lower on the day. 10-year government bonds closed 1bp higher at 4.45%.

Australian 10-year government bond futures are ~2bp higher in yield terms since the local close yesterday suggesting a modest upward bias for NZ yields on the open.

The NZGB market looks ahead to the weekly bond tender this afternoon. New Zealand Debt Management (NZDM) is tendering NZ$500 million of nominal NZGBs split across May-29 ($175m), May-34 ($250m) and May-41 ($75m). Last week’s tender was cancelled due to the timing of the tap syndication of the May-2030 nominal maturity.

The ANZ Business Survey is for October is released today. The activity outlook has surged in recent months and has been materially above similar indicators including the Quarterly Survey of Business Opinion. Chinese PMIs will be monitored to see if the recently announced stimulus measures will improve sentiment. The Bank of Japan is expected to leave its policy rate unchanged at 0.25%.

Euro-area core CPI is expected increase at a 2.6% annual rate, marginally below the 2.7% reading for September. ECB president Lagarde suggested inflation risks are skewed lower in the press conference accompanying the 25bp cut this month. Given the US PCE details were revealed in the GDP release, attention will centre on the Q3 employment cost index which is the Fed’s preferred wage metric.