US retail sales show a robust end to last year. Incoming US Treasury Secretary Bessent gives market-friendly comments. Japanese yen firms as market confident of a rate hike coming

The biggest market moving event overnight was some dovish comments by Fed Governor Waller which triggered a fall in interest rates after an earlier lift. In an interview with CNBC, Waller said “the inflation data we got yesterday was very good…if we continue getting numbers like this, it’s reasonable to think rate cuts could happen in the first half of the year”.  He added that he wouldn’t entirely rule out a cut by March and, based on the FOMC’s median estimate of the neutral policy rate, three or four cuts this year are possible, depending on incoming data.

His comments triggered an 8bps fall in the 10-year Treasury yield from 4.68% to 4.60% before the market settled.  It currently trades at 4.61%, down 5bps from the NZ close. The 2-year rate showed a similar move while the market priced in the chance of more Fed easing this year, up 5bps to 44bps with the next full rate cut priced by June (from July).

Supporting the bond market rally, were some market friendly comments as Trump’s pick for Treasury Secretary, Scott Bessent, appeared before a Senate committee for his confirmation hearing. His prepared remarks were released yesterday where he said maintaining the USD as the world’s reserve currency was critical to US economic health and he emphasised the need to secure supply chains and carefully deploy sanctions. He also emphasised the importance of addressing the budget deficit. In the Q&A he said supported extending the 2017 Republican tax cuts, “this is the single most important economic issue of the day”, while regarding the deficit he said spending was the issue, not revenue. He supported the Fed remaining an independent central bank.

Economic data released were not particularly market moving. Retail sales data were solid, with the control group measure that feeds into GDP up 0.7% m/m, three-tenths stronger than consensus, and capping off a strong quarter, rising at an annualised 5.4% pace. The headline and ex auto and gas measures were slightly weaker than expected at 0.4% m/m and 0.3% m/m respectively.

For the second-tier US releases, initial jobless claims rose a higher-than-expected 14k last week to 217k, the NAHB housing market index ticked higher to 47, while the Philadelphia Fed business outlook index surged higher to a head-scratching 44.3, one of the highest readings in forty years, possibly reflecting some front running of activity ahead of increased import tariffs.

UK GDP and industrial production figures were weaker than expected.  The 0.1% lift in November meant that the three-monthly figure was flat, with the economy basically flatlining since the new government took office.

In currency markets, Waller’s comments resulted in some mild downside pressure for the USD but net changes for the day have been small. Again, JPY has been the strongest performer. Adding to comments earlier this week by BoJ Governor Ueda and Deputy Governor Himino about next week’s policy meeting being live, Bloomberg reported that BoJ officials see a good chance of an interest rate hike as long as the arrival of Trump at the White House doesn’t trigger too many negative surprises. The OIS market shows +21bps currently priced for the meeting. USD/JPY is down 0.8% for the day at 155.30.

The NZD fell to an overnight low just over 0.5580 and has since recovered, thanks to Waller, to 0.5615, little changed from the NZ close and from 24 hours ago. Same goes for the AUD at 0.6215.  Reaction to Australian labour market data yesterday was modest. The data suggested the labour market remained tight, with the unemployment rate nudging up to 4.0%, tracking below RBA projections, a factor which could encourage the Bank to hold off from kick-starting an easing cycle, although core CPI inflation looks to be running below the RBA’s projection. NZD/AUD has been flat, hovering around 0.9025. Other NZD crosses show small changes apart from a 0.8% fall in NZD/JPY to 87.1.

Global forces sent NZ rates down yesterday, led by the long end of the curve, resulting in some curve flattening.  The 10-year NZGB rate (2035) fell 10bps to 4.76%. There was strong demand at the first government bond tender for the year, particularly for the longer-term issues, supporting an 11-12bps fall for the ultra-long bonds. In the swaps market the 2-year rate fell 4bps to 3.61% while the 10-year rate fell 7bps to 4.01%. NZ monthly CPI data didn’t change our estimate for Q4 CPI – released next week – which remained at 0.6% q/q and 2.3% y/y, two-tenths higher than the RBNZ’s November projection.

In the day ahead, the NZ manufacturing PMI will be released followed by China Q4 GDP and December activity data. The consensus is picking that growth picked up in Q4, driving a lift in the annual gain to 5.0% y/y for the quarter and 4.9% on an annual average basis, not coincidently in line with the government's 5% target. Tonight sees the release of UK retail sales and US housing starts, building permits and industrial production.