Global equity markets began the new month on a positive note despite weaker than expect US labour market data. The S&P closed 0.4% higher while stocks in Europe also advanced as investors look ahead to the FOMC and US election this week. Global bond yields whipsawed but ultimately ended higher after dropping immediately following the data. The US dollar was generally stronger against G10 currencies. After markets were closed, OPEC+ announced it plans to delay its December output hike by one month.
US Nonfarm payrolls increased 12K in October, well below the consensus expectation for a 101k gain, with recent weather events a contributing factor. In addition, there were downward revisions totaling 112k for the previous two months. The Bureau of Labor Statistics said the two hurricanes impacted hiring in some industries, but it wasn’t possible to quantify the net effect on the change in employment, hours or earnings.
The unemployment rate held at 4.1% and hourly earnings remained firm. This is the last major data point before the FOMC, and while the Federal Reserve will likely attribute some of the weakness in payrolls data to one-off factors, it is consistent with a further rate cut this week. Market pricing is little changed, with 25bp cut largely discounted for the meeting, and a total of 46bp by the end of the year.
The US manufacturing ISM remained in contractionary territory for the seventh consecutive month. The index dipped to 46.5, the lowest level since July 2023, with a drop in the production subindex weighing which is consistent with a downturn in manufacturing output. The ISM noted that election uncertainty is impacting investment in inventory and capital expenditure. The prices paid subindex increased to a five-month high.
US treasuries were volatile with a large intra-day swing. Yields dropped immediately after the payrolls data – 2-year traded from 4.21% to a low of 4.06% - before reversing course to end the session at 4.21%. 10-year yields closed 10bp higher at 4.38%, a new high for the move that began in September. The market remains cautious ahead of the election with implied volatility at the highest level in more than twelve months. There is 3, 10 and 30-year treasury supply to absorb this week.
The post-Budget selloff in UK gilts, which pushed 10-year yields to the highest level in a year, has abated. Chancellor Rachel Reeves said that economic and fiscal stability is her ‘number one commitment’. Gilt yields reached an intra-week high of 4.53%, up from 4.20% ahead of the Budget, before closing at 4.44%. 10-year bunds closed 2bp higher at 2.40%.
US dollar price action aligned closely with treasuries. An initial dip reversed, and the dollar index closed 0.3% higher. The pound performed and was the only G10 currency that gained against the US dollar, as UK markets calmed after the Budget volatility. The Swiss franc was relatively weak after inflation slowed unexpectedly. The CFTC reported speculative accounts have continued to accumulate long US dollar positions.
NZD/USD spiked towards 0.6000 but subsequently retraced to end the offshore session marginally weaker. The NZD was broadly stable on the major cross rates except for NZD/GBP which traded down towards 0.4610.
It was a relatively quiet session for NZ fixed income in the local session on Friday. 2-year swap rates closed 3bp higher at 3.68% while 10-year rates increased 1bp to 4.17%. NZ continued to outperform on a cross-market basis. The 10-year government bond spread against Australia fell to -8bp, as ACGB yields increased to the highest level since last November. A negative cross-market spread is a relatively rare occurrence, the last time being during the pandemic, when the RBNZ was considered the possibility of a negative policy rate. 10-year NZGBs closed at 4.47%.
Australian 10-year government bond futures are 7bp higher in yield terms since the local close on Friday, and combined with the mover in US treasuries suggests an upward bias for NZ yields on the open.
There is no domestic or international economic data of note today. However, it is event laden week ahead with NZ Q3 labour market data, central bank meetings in Australia, the US and the UK in addition to the US election, which could be impactful for markets.
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