US CPI data matched expectations contributing to a relief rally in short dated US treasuries. The chance of a 25bp rate cut at the December FOMC has increased to close to 80% according to market pricing

After the selloff in the previous session, front end US treasuries recovered following CPI data that matched expectations and raised expectations of a December rate cut by the Federal Reserve. US equity markets are little changed with major indices continuing to consolidate after the strong post-election rally. The US dollar extended its recent gains against G10 currencies.

US CPI data for October matched expectations. Headline inflation increased 0.2% on the month, taking the annual rate to 2.6%, up from 2.4% in September. Core CPI rose 3.3% on an annual basis. As has been the case for some time, housing accounted for most of the increase in core CPI. The super core services measure increased 0.3% on the month, down from 0.4% in September, which provided some comfort to the market.

The on-expectations CPI print prompted a relief rally in US treasuries led by the front end of the curve. 2-year yields fell 7bp to 4.27% with the market firming up expectations for a 25bp cut at the December FOMC. There is 21bp of easing priced, up from 15bp ahead of the CPI data. 10-year yields are little changed at 4.42% having retraced after a temporary dip in response to the CPI print.

German bunds were little changed while 5-year JGB yields closed 3bp higher at 0.68%, the highest level since November 2009.

The US dollar extended its uptrend overnight despite the pullback in front end yields. The dollar index is testing the 2024 high reached in April. USD/JPY traded above 155 for the first time since July and towards levels where Japanese authorities have previously intervened to provide support. EUR/USD fell to a fresh 2024 low towards 1.0550.

The Peoples Bank of China (PBOC) signalled some discomfort with the recent yuan weakness set against the threat of higher US tariffs under the Trump administration. The PBOC set the fix stronger than expected yesterday by the widest margin since August, which if sustained, is typically associated with pushing back against market pricing.

The stronger CNY fix contributed to a modest NZD/USD rebound in the Asian session but that proved short-lived. The NZD fell below 0.5900 against the dollar overnight and looks set to test the August low near 0.5850 in coming sessions. The NZD is little changed against the AUD but modestly weaker on the other major cross rates.

NZ fixed income yields ended the local session yesterday higher in yield reflecting the move in offshore markets. Swap rates closed 4-5bp higher across the curve. 2-year rates ended the session at 3.93%, well above the 3.50% low at the beginning of October. The market has continued to push the terminal cash rate higher, which largely reflects offshore dynamics and positioning, rather than domestic fundamentals.

Government bonds underperformed the moves in the swaps. 10Y NZGB yields increased 7bp to 4.66% to the highest level since July. New Zealand Debt Management (NZDM) is tendering NZ$500 million of nominal NZGBs split across Apr-29 ($200m), May-35 ($250m) and Apr-37 ($50m). NZDM are offering the nominal 2035 maturity for the second consecutive week with the line attracting solid demand in the previous tender.

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

NZ selected price indicators for October will be closely monitored to assess how inflation is tracking to start Q4. RBA Governor Bullock is appearing on a panel, but it is unlikely she will provide additional information on the policy outlook, given the limited data since the November policy meeting. Australian labour market for October is expected to show the unemployment remained unchanged at 4.1%.

US PPI data is released this evening and along with inputs from the CPI, will help refine estimates for the Fed’s preferred PCE measure of inflation. The impact of the Boeing strike and Hurricanes is expected to have faded from the initial jobless claims data with the consensus looking for a 220k increase.