US equities are marginally higher in afternoon trade while treasury yields increased as investors digested President-elect Trump’s announcement that he would impose tariffs on Mexico, Canada and China at the beginning of his term. There was limited market reaction to upbeat US consumer confidence data. European equities declined with the Euro Stoxx closing 0.6% lower.
The Conference Board index of consumer confidence rose to the highest level since January which was in line with consensus estimates. Consumers are more optimistic about the labour market. However, the balance saying jobs are hard to get less those saying they are plentiful is still consistent with a modest rise in the unemployment rate. Separately, new home sales were weaker than expected.
The market is pricing 14bp of easing by the Federal Reserve at its December meeting which is little changed in recent sessions. The minutes for the November FOMC will be released after we publish Markets Today this morning. The minutes are likely to note a shift in the balance of risks towards resilient growth and some inflation persistence.
US treasury yields moved higher across the curve, partially retracing the sharp decline, from the previous session. 10-year yields are 4bp higher at 4.31% ahead of the US$70 billion 5-year auction. 10-year bunds closed 2bp lower at 2.19%. A 3bp move higher in French yields saw the France-Germany spread reached the widest level since 2012.
The US dollar made sharp gains in the Asian session yesterday, after Trump said that he will levy tariffs of 25% on all imports from Canada and Mexico, and an extra 10% tariff on Chinese goods, in a post on his social media site. Although the dollar made broad-based gains, Mexican peso (MXN) and the Canadian dollar (CAD) were the most impacted, with the latter reaching the lowest level against the US dollar in four years.
The comments reduced investor expectations for a more moderate stance on tariffs after the nomination of Scott Bessent for the Treasury Secretary role. While any implementation is highly uncertain, the lingering risks for fresh headlines will keep investors on edge and market volatility elevated.
The US dollar was stable against the euro and yen in offshore trade. The CAD staged a partial recovery against the dollar while the MXN remained under pressure. Having fallen to a fresh 2024 low near 0.5800 yesterday, NZD/USD has recovered off the lows, trading above 0.5860 overnight before fading. The AUD underperformed within G10 currencies, with NZD/AUD trading back above 0.9000.
NZ fixed income ended lower in yield in the local session yesterday, reflecting the treasury-led rally in global rates markets, in the absence of domestic data. There was a brief move higher in yield after Trump’s tariff comments but ultimately NZ rates closed near the session lows. 2-year swap rates declined 3bp to 3.61%. The swap curve flattened modestly with 10-year rates closing 5bp lower at 4.09%.
Australian 10-year government bond futures little changed since the local close yesterday, which suggests limited directional bias, for NZ yields on the open.
It is a busy day ahead from a data perspective. Economists unanimously expect the RBNZ to reduce the OCR by 50bp to 4.25% at the Monetary Policy Statement. The Bank will also release updated forecasts including its modelled cash rate projections. The overnight index swap market is pricing ~57bp of easing for the meeting, implying some chance of a larger 75bp cut.
The October monthly CPI Indicator will be closely monitored in Australia. It only covers a subset of the full CPI basket, and being the first month of the quarter, is goods heavy and contains little information on services inflation. The market isn’t pricing a full 25bp cut by the RBA until the May meeting.
The second estimate of US Q3 GDP is released later this evening and is expected to be unrevised from the advance reading (2.8% quarterly annualised). CPI and PPI data indicate the Fed’s preferred inflation measure, the core PCE deflator, rose by 0.30%, lifting the annual inflation rate to 2.8%, from 2.7% in September.
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