Global equities ended last week on a soft note with losses for major Asian indices and initial gains for US markets fading. The S&P ended the session flat and closed the week nearly 1% lower. The Hang Seng fell 2% after Chinese policy makers pledged to boost consumption, but failed to offer details on fiscal stimulus, which disappointed investors. Global bond yields moved higher, and the US dollar had a mixed performance against G10 currencies. Brent crude prices advanced to US$74.40 per barrel and extended its weekly gain to nearly 5%.
Confidence amongst the largest Japanese manufacturers edged higher to 14 in December. This is the last major data release ahead of the Bank of Japan’s policy meeting on Thursday. Although the economic backdrop is consistent with a further normalisation in policy, the consensus is for the Bank to leave rates on hold this month, but for Governor Ueda to hint in the press conference that a rate hike is likely in January.
The Bundesbank reduced its 2025 growth forecast to just 0.1% and warned that that a trade war with the US could push the economy into recession. The central bank estimates tariffs on all US imports could reduce German GDP by 0.2- 0.6% next year. In June, it had forecast the economy would grow 1% in 2025.
The selloff in US treasuries continued despite the lack of US economic data. 10-year yields increased 6bp to 4.39% with the curve steepening. The reversal higher has seen 10-year yields increase 25bp over the past week and approach levels seen in November after the US election. The 2y10y UST curve has steepened back to 16bp from close to flat at the beginning of December.
European bond yields also increased and extended the move seen in the aftermath of the ECB meeting the previous day. German bund yields closed 5bp higher across the curve despite the gloomy prognosis from the Bundesbank on the outlook for the economy.
Providing a contrast, bond yields in China have continued to decline with policy makers having signalled reductions in policy rates and banks’ reserve ratios. Earlier last week, the Communist party’s politburo changed its monetary policy stance to ‘moderately loose’ from ‘prudent’ for the first time in 14 years. 10-year bond yields have fallen below 1.8% for the first time in history, and increasingly wide yield differentials with the US, is likely to keep pressure on the yuan.
The US dollar index was little changed overall in the offshore session Friday, but this masked divergent performance for major currencies. The yen weakened in line with the higher UST yields while the euro traded higher against the dollar. The UK economy contracted for a second straight month in October which weighed on the pound. The NZD was little changed against the dollar. An initial rally above 0.5770 faded and NZD/USD closed near the weekly and 2024 lows.
NZ fixed ended the local session on Friday higher in yield with limited domestic or regional catalysts. The market looked past ongoing weakness in the manufacturing sector. The PMI dipped modestly relative to October and extended the period in contractionary territory to 21 consecutive months. Swap rates were market flat to 1bp higher across the curve with 2-year closing at 3.59%.
10-year government bond yields increased 4bp to 4.39%. The underperformance relative to swaps saw swap spreads decline to -41bp equalling the recent multi-year lows. Australian 10-year government bond futures are 4bp higher in yield terms since the local close on Friday, which suggests an upward bias, for NZ yields on the open.
It is a full economic calendar to start the week. The NZ services PMI and inflation partials will be closely monitored. Monthly activity data covering retail sales data and industrial production in China is released. And later this evening ECB president Lagarde is speaking following the bank’s decision to cut rates by 25bp to 3.0% last week. PMIs for Europe and the US are scheduled.
Looking ahead to the remainder of the week, the domestic focus will centre on the government’s Half Year Economic and Fiscal Update and Q3 GDP data. Global central banks will also be in focus with the US Federal Reserve, Bank of Japan and Bank of England all releasing monetary policy decisions.
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