US equity markets declined set against the backdrop of economic data, which was consistent the cautious pace of easing, outlined in the November FOMC minutes yesterday. The S&P is down 0.6% in afternoon trade, but remains close to its record high, reached earlier in the week. The US dollar fell sharply, which is likely attributable to month-end rebalancing flows, although lower treasury yields were likely a factor as well.
The core PCE deflator increased 0.3% in October, taking the annual rate to 2.8%, from 2.7% the previous month. Both readings were in line with consensus estimates. The monthly gain is the largest since March. Real consumption rose by 0.1%, slightly below the 0.2% consensus. Overall, the stalling disinflation momentum aligns with the Fed slowing the pace of rate cuts.
US GDP data was unchanged from the preliminary reading for the three months to the end of September. The economy grew at a 2.8% annualised rate in Q3. Separately,
US weekly jobless claims fell to 7-month low of 213k. However, continuing claims increased to 1.91mn which is the highest level more than a year.
The market is pricing 17bp of easing at the December FOMC, little changed in response to the data. US treasury yields traded lower with the curve bull flattening. 10-year yields declined 7bp to 4.23% and are now comfortably below pre-election levels. There was strong demand in the US$44 billion 7-year note auction which cleared below the prevailing market yield. All three treasury maturities offered this week have seen strong demand from investors.
European bond yields declined. The spread between French and German 10-year sovereign bonds reached the highest level since the Eurozone crisis in 2012. Investors are concerned Prime Minister Barnier may struggle to pass his budget for next year aimed at curbing the fiscal deficit.
The US dollar fell sharply against G10 currencies with the dollar index declining close to 1%. Some of the retracement is likely linked to month end rebalancing flows, after the strong relative performance of US equities, during the month. The dollar’s decline was most pronounced against the major pairings while the NZD, AUD and Canadian dollar made more modest gains.
Amid the dollar weakness, NZD/USD traded back above 0.5900, marking a sharp rebound from the low near 0.5800, earlier in the week. NZD/AUD has continued to press higher and extended above 0.9090. NZD/JPY slipped below 89.00.
The RBNZ reduced the OCR by 50bp to 4.25% which was line with economists’ estimates despite the market pricing a chance of a larger 75bp cut. The Monetary Policy Statement outlined that economic activity remains subdued, and inflation is sustainably within the target range. If economic conditions continue to evolve in line with its projections, the Bank expects to be able to lower the OCR further early next year.
NZ swap rates moved sharply higher immediately after the RBNZ decision yesterday, with the market interpreting the updated projections, as a signal the Bank will slow the pace of easing going forward. However, Governor Orr’s comments in the press conference that the modelled OCR track is ‘consistent with a 50bp cut in February’ contributed to a reversal off the session highs. 2-year swap rates closed 10bp higher at 3.71%. The swap curve flattened modestly with 10-year rates closing 4bp higher at 4.13%.
Government bonds outperformed at the margin with 10-year yields up 3bp to 4.45%. NZDM will offer NZ$500 million of nominal NZGBs in the weekly tender today split across Apr-29 ($250m), Apr-33 ($175m) and May-41 ($75m). Australian 10-year government bond futures are 7bp lower in yield terms since the local close yesterday, which suggests a downward bias, for NZ yields on the open.
October filled jobs are released today which will give a sense of how employment is tracking into the final quarter of the year. November’s ANZ business survey is likely to maintain the divergence between weak current activity and positive forward-looking indicators. The inflation components within the report will be closely monitored.
RBA governor Bullock is speaking later this evening. The market will be looking for clues on what the central bank would need to see to shift its assessment of the economy and monetary policy. US Bond and equity markets are closed for Thanksgiving and have a shortened trading session on Friday.
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