US economy grew at a 2.3% in Q4 driven by strong consumer spending. Eurozone growth was flat in Q4. ECB cut rates and signalled more easing ahead. Gold prices reached an all time high

US asset markets are little changed despite data showing solid economic activity in the December quarter. The S&P is marginally higher on the day while US treasury yields are unchanged. The Euro Stoxx gained more than 1% and Eurozone bond yields fell as the European Central Bank (ECB) cut its policy rate. Gold prices reached an all time high just below US$2,800 per troy ounce.

The US economy grew at a 2.3% annualised rate in Q4, slightly below consensus expectations. Growth was driven by strong consumer spending which increased 4.2% in the quarter. This took annual growth in 2024 to 2.8%, after expanding 2.9% and 2.5%, in the prior two years. The core PCE deflator increased 2.5% in Q4 which implies a 0.17% monthly increase in December.

US initial jobless claims decreased 16k to 207k, below the consensus estimate. The fall primarily reflects the diminished impact from the fires in California.

Market pricing for Fed easing is little changed following the data with ~47bp of cuts implied by the end of the year. The FOMC statement, accompanying the steady rates decision yesterday, characterised the labour market as ‘solid’ and inflation as ‘somewhat elevated’. Chair Powell said the Fed is not in a rush to lower interest rates and is waiting to see further progress on inflation.

Eurozone growth was flat in Q4, which was marginally weaker than expected, with the German and French economies contracting in the quarter. Annual growth in the Eurozone was 0.7% for 2024.

The ECB cut rates by 25bp to 2.75%. It was the fifth consecutive cut and was in line with expectations. The Bank described its monetary policy stance as ‘restrictive’, signalling more easing is coming, but not pre-committing to any rate path. The market is pricing close to three further 25bp cuts by the end of the year. European bonds rallied with 10-year bund yields closing down 7bp at 2.51%.

Outright moves across G10 currencies were modest overnight. EUR/USD was volatile around the ECB decision dipping below 1.0400 before moving sharply higher and is now little changed. The yen has strengthened against the dollar, with some linking the move with a Bloomberg article highlighting the Bank of Japan is beginning to normalise its balance sheet, by phasing out its fund-provisioning programme. The NZD is little changed against the dollar and on the major crosses.

NZ swap rates edged up in the local session yesterday with the curve steepening modestly. The initial move higher, reflected offshore moves, as investors digested the implications of the FOMC. 2-year rates retraced from the session highs to close at 3.46%, unchanged on the day, while 10-year rates closed 3bp higher at 4.08%. There was limited market reaction to the ANZ business survey, which indicated softer activity, and saw inflation indicators increase at the margin.

There was decent investor demand in the government bond tender with bid cover above three for all lines. The government curve made a parallel shift 2bp higher with 10-year bonds closing at 4.57%. Australian 10-year government bond futures are unchanged since the local close yesterday, suggesting a limited directional bias, for NZ yields on the open.

ANZ consumer confidence is the only domestic data of note today. The US Q4 Employment Cost Index and personal income and spending data for December, which includes the PCE deflator, are released later this evening.