US equities ended the week on a strong note, with the S&P500 closing up 1.0%, taking the gain for the week to 2.9%. Themes for the week were a strong start to the earnings season, led by the banking sector, benign CPI inflation data, dovish comments from Fed Governor Waller and, while Treasury yields nudged higher on Friday, the 10-year rate still fell 13bps for the week to 4.63%.
Adding to the positive sentiment to close the week, Trump called Chinese President Xi. Trump said on social media “the call was a very good one for both China and the U.S.A…we discussed balancing Trade, Fentanyl, Tik Tok, and many other subjects”. The readout from the Chinese side was full of warm fuzzies and respectful about natural disagreements saying, “confrontation and conflict should not be an option for the two countries”, adding “The two leaders agreed to set up a channel of strategic communication to keep in regular touch on major issues of shared interest.” During the weekend, the WSJ reported Trump has told advisors he wants to travel to China after he takes office.
News of the Trump-Xi phone call drove down the USD by about 0.5% but the fall wasn’t sustained and prior USD strength returned, with the DXY index up 0.4% for the day. Against a backdrop of broad USD strength, the NZD closed the week on a soft note to just under 0.5585 but it still managed to gain 0.5% for the week. NZD crosses saw some modest upside and downside movements but nothing significant. NZD/AUD closed near the bottom of its range this year at 0.9015.
US second-tier economic releases were stronger than expected and US Treasury yields pushed higher after their release and into the close, seeing the 2-year rate up 5bps on the day and the 10-year rate up 1bp to 4.63%, reversing an earlier fall to 4.57%.
Industrial production rose by a much stronger than expected 0.9% m/m in December, supported by the end of the Boeing strike and weather-related utilities output but core manufacturing production was also stronger, breaking a run of monthly declines. Housing starts surged by 15.8% m/m in December, driven by the volatile multi-family component, but single-family starts were also strong, climbing 3.3% m/m. Building permits fell by a smaller than expected 0.7% m/m.
UK retail sales were much weaker than expected alongside downward revisions, with volumes excluding auto fuel down 0.6% m/m in December. The data followed the previous day’s release showing flat GDP over the three months to November, adding to the narrative of a UK economy struggling to gain any traction under the new government. The release saw EUR/GBP move back up to recent highs, while the broadly stronger USD was the driver behind the 0.6% fall in GBP to 1.2170.
China GDP picked up in Q4 as expected, with positive revisions seeing the annual increase for the quarter at 5.4% y/y, above the expected 5.0%. For the full year, growth matched the government’s 5% target, not coincidentally, with the ramp up in stimulus later in the year saving the day, while the cynical might also refer to a massaging of the data. For the month of December, industrial production was particularly strong at 6.2% y/y, with some front-loading of shipments to avoid forthcoming US import tariffs.
The domestic rates market showed little movement on Friday, with no change across the swaps curve and some curve flattening pressure for NZGBs, with slightly higher rates at the short end and slightly lower rates at the long end. The 2035 bond closed the day down 2bps to 4.74%.
The day ahead will be quiet with no key economic releases, Wellington on holiday and the US on holiday overnight. Trump’s inauguration as the 47th US President begins tomorrow morning NZ time and, soon after, the market will be on the look out for any early executive orders. Indeed, through the week, focus will be on President Trump’s immediate policy decisions.
On the economic calendar this week, domestically the focus will be on the Q4 CPI release on Wednesday. Key global events this week include CPI releases for Canada and Japan, the BoJ meeting at the end of the week where a rate hike is widely expected, UK labour market data and global PMI data.
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