US equities continue to push higher with modest gains while the US 10-year rate is down 7bps from the NZ close before the Waitangi Day holiday, albeit modestly higher for the current trading day. GBP has been the weakest of the majors, JPY has been the strongest, and the NZD has been range-bound between 0.5650-0.57.
In overnight news, as widely expected the BoE cut its policy rate for a third time by 25bps to 4.5% but surprisingly the MPC vote was 7-2, with two dissents voting for a larger 50bps cut, including the usually hawkish Catherine Mann. The policy outlook statement signalled a “gradual and careful approach” to future rate cuts, the addition of the word “careful” a change from the previous statement. The inflation forecasts showed a temporary sharp rise to 3.7% later this year (up from a previous peak of 2.8%), while projected growth for 2025 was halved to 0.75%.
Despite the mixed messages, initially the market put more weight on the more dovish vote, driving down rates and GBP, but much of this reversed. The market currently prices a further 60bps of rate cuts this year, little changed from the previous close and the 2-5bps lift in UK gilt yields for the day is broadly in line with US rates. GBP fell to almost 1.2360 and is currently 1.2440. Relative to the NZ close before Waitangi Day, this still makes GBP the weakest of the majors and NZD/GBP is up modestly to 0.4560.
In economic data, US initial jobless claims rose 11k to 219k last week, higher than expected, but the bigger picture being one of claims remaining relatively low and no change to the narrative that the labour market is close to equilibrium. Productivity grew at an annualised 1.2% in Q4, seeing unit labour costs at 3.0%, with a y/y increase of 2.7%, broadly in line with core PCE inflation. The previous day the key release was the ISM services index, which came in weaker than expected, falling 1.2pts to 52.8, alongside a 4pts fall in the prices paid index to 60.4.
On Wednesday, the US Treasury said it planned to keep the size of longer-dated Treasury issuance constant for the next several quarters, calming fears that new Treasury Secretary Bessent would favour an increase, in lieu of short-term debt or T-bills. Yesterday, Bessent told Fox Business that the Trump administration’s focus is on bringing down 10-year Treasury yields, not the Fed Funds rates. He believes expanding energy supply to help lower inflation and reducing the budget deficit will help bring down the 10-year rate.
At the NZ close pre-Waitangi Day, the US 10-year rate was trading at 4.51% and it fell to a low of 4.40% yesterday morning and has since pushed higher to 4.44%. The global backdrop has been one of modestly upside pressure on rates for the current trading day, reversing some of the previous day’s decline.
The NZD has traded broadly in a 0.5650-0.57 range since the last NZ close, the lift to just above that range post the soft US ISM services report proving temporary. NZD/CAD and NZD/EUR show little net movement since pre-Waitangi Day, while NZD/AUD is down modestly to 0.9030. The yen is the strongest of the majors, with USD/JPY trading just below 152, its lowest level in over a month, while NZD/JPY has pushed down towards 86.
Japan wages rose by 4.8% y/y in December, a fresh three decade high, driven by a jump in bonuses. The measure the market is more interested in – scheduled full-time pay on the same base– rose an in-line 2.8% y/y, showing some relative stability over the past six months. Focus turns to the next spring round of negotiations. The yen received a temporary boost yesterday after BoJ board member Tamura believed two more rate hikes by early next year to take the policy rate to 1.0% would be required to contain upside risks for prices. The yen continues to hold appeal, being historically extremely cheap, the BoJ tightening against the grain of easier policy elsewhere, and the yen’s safe-haven characteristics during uncertain times amidst a possible US trade war.
Post the Chinese New Year holidays, all eyes were on the PBoC in how it set the CNY reference following the US reigniting the US-China trade war, following the increased 10% tariff rate. In the event, the PBoC continued to set a strong level, signaling an unwillingness, at this juncture, to use the yuan as a weapon to counteract tariffs.
In the domestic rates market on Wednesday, the weekly bond tender against attracted strong bidding interest, with bid cover ratios of around 4-5½ across the three lines on offer, and all clearing 2bps through pre-tender mids. However, the net movement in yields for the day was small, with yields down 1bp across the curve. That was an underperformance relative to the swap market, where the 2-year rate was marked up 4bps to 3.37% and the 10-year rate was up 2bps. NZ labour market data, showing weak employment, the unemployment rate rising to a fresh four-year high of 5.1%, and softer wage inflation were in line with market and RBNZ expectations.
While the US 10-year is 7bps lower since the last NZ close, the Australian 10-year bond future is only down about 2bps in yield terms.
On the economic calendar, focus will be on the US employment report tonight. The release will incorporate the previously flagged significant downward revisions following the annual benchmarking exercise, in the order of 600-700k for the level. For January, the consensus sees 170k employment growth leading to an unchanged unemployment rate of 4.1% and modest average hourly earnings growth of 0.3% m/m.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.