Limited market reaction to soft US PPI data as investors look ahead to the key CPI release this evening. Reports of a gradual approach to tariffs weighs on the US dollar.

Global asset markets are little changed despite an unexpected slowing in US PPI data, with the market looking ahead to the more impactful CPI data, which is released this evening. Intra-day gains for the S&P after the PPI data have faded and the index has slipped into negative territory in afternoon trade. European equities closed higher with the Euro Stoxx up 0.5%. Treasury yields are marginally higher while the US dollar is weaker.

US PPI inflation unexpectedly cooled in December. The core reading was unchanged during the month which was well below the 0.3% consensus forecast. However, some of the components that feed into the Federal Reserve’s preferred inflation measure, the core PCE deflator, were elevated. The CPI release will provide the remaining inputs required to estimate core PCE which is released at the end of the month.

The market reaction to the PPI data was relatively muted. 2-year treasury yields dropped 5bp from the session highs near 4.40% but have since retraced to be little changed. After a temporary dip 10-year treasury yields remain near the cyclical peak at 4.79% with the curve marginally steeper. European bonds are generally higher in yield. 10-year bunds increased 4bp to 2.64% and are approaching the 2.69% high from 2024.

The US dollar is broadly weaker against G10 currencies. The move began in Asia after Bloomberg reported that Trump’s economic team is discussing a gradual approach to tariffs to avoid a spike in inflation. The dollar’s move lower extended after the PPI data. The euro was the strongest major pairing while the yen underperformed. A speech by Bank of Japan Deputy Governor Himino signalled the possibility of a rate hike at next weeks meeting but that wasn’t sufficient to support the yen.

The latest Commodity Futures Trading Commission (CFTC) data covering positioning in currency futures for the week ended 7 January, revealed speculative accounts hold a US$34 billion aggregate long US dollar position, which is the largest since 2019. The CFTC data also indicated that speculative accounts added to NZD short positions which have a reached a record level.

NZD/USD rebounded from the two-year low in the Asian session yesterday and traded above 0.5600 overnight. However, the upside momentum faded. The NZD is softer against the euro and is little changed on the other main crosses.

Indicators within the Quarterly Survey of Business Opinion were consistent with a slow recovery in economic activity and muted inflation pressures. There was a modest improvement in hiring intentions and other labour market indicators, albeit from depressed levels. The NZIER noted that weak demand is weighing on inflation and that firms cite the lack of demand as the primary constraint on business.

NZ fixed income yields moved sharply higher in the local session yesterday and underperformed on a cross-market basis with Australian yields little changed. The sell-off was driven by positioning and flows as there was no fundamental driver. The front end of the curve saw the greatest pressure with 2-year yields increasing 13bp to 3.58%. 10-year rates increased 8bp with the 2y/10y curve retracing to 64bp from the recent peak above 70bp.

The sell-off in swaps contributed to a repricing across the government curve. 10-year bonds closed 8bp higher at 4.79%. Australian 10-year government bond futures are little changed since the local close yesterday suggesting limited directional bias for NZ yields on the open.

There is no domestic or regional data in the day ahead. CPI data for December in the UK will be in focus with the gilt market on edge. 10-year gilt yields have increased to a 16-year high and higher borrowing costs are putting pressure on the fiscal outlook.

US core CPI to is expected to increase by 0.3% for the fifth consecutive month in December, which if realised, will contribute to concerns that the disinflation process is stalling. Rising gasoline and food prices looks set to boost headline CPI.