US equites are flat in afternoon trade in the absence of first-tier economic data or other catalysts to provide direction. US treasuries are little changed, and outperformed European fixed income markets, which moved higher in yield after hawkish comments from an ECB official. President Trump said he would likely impose tariffs on cars, semi-conductors and pharmaceutical imports of around 25%. An announcement is expected in early April. European stocks retraced from a record high with the Euro Stoxx index falling 1.3%.
US treasury yields are modestly lower at the front end of the curve while 10-year notes are steady at 4.55%. The Financial Times reported that China’s holdings of US treasuries have fallen to the lowest level since 2009. Total holdings fell to US$759 billion, a decrease of US$57 billion in 2024. The decrease likely reflects a diversification into alternative assets like gold, and China holding a portion of its treasuries in custodian accounts, domiciled in other countries.
European bonds underperformed US treasuries. 10-year bund yields closed 6bp higher at 2.55%. The amount of ECB easing priced for this year declined to ~72bp after Executive Board member Isabel Schnabel said the Bank may need to pause or halt its interest rate reductions. She said ECB officials should discuss whether to remove language from its post-meeting statement in March that says monetary policy is still restraining the euro-zone economy.
UK headline CPI rose 3% in January which was above consensus estimates. This is the highest level in ten months and compares with 2.5% in December. Core CPI increased by 3.7% while services prices increased 5.0%, both close to economists’ estimates. The pickup in headline inflation had been well telegraphed and limited the market impact. There is around 52bp of Bank of England rate cuts priced by December, which was little changed following the data.
The US dollar is broadly stronger against G10 currencies. The euro slipped towards 1.04 with limited lasting support from Schnabel’s comments. The yen outperformed within G10 currencies. Bank of Japan Board Member Takata said it is important to continue considering gradual interest rate hikes to contain upside risks to inflation.
The post-RBNZ weakness in NZD/USD quickly reversed in the local session yesterday. Since our close, the NZD has largely matched G10 currencies and is weaker overnight, having retraced back below 0.5700. The NZD was stable on most of the major crosses except NZD/JPY which fell back towards 86.40.
The RBNZ matched expectations and market pricing and delivered a 50bp reduction in the OCR to 3.75% at the Monetary Policy Statement yesterday. The accompanying statement outlined consumer price inflation is near the 2% midpoint of the target band, economic activity is subdued, and spare capacity is weighing on domestic price pressures. The Bank maintained a clear easing bias. Its downwardly revised modelled OCR track aligns with 25bp cuts at each of at the next two meetings a terminal OCR near 3%.
NZ fixed income yields fell immediately after the Policy Statement was released. However, the move largely unwound during the press conference after Governor Orr indicated further easing would likely come in 25bp increments, albeit this pace aligning with the RBNZ’s published OCR track. After reaching a low of 3.48%, 2-year swap rates closed 2bp higher and unchanged from pre-MPS levels. The curve flattened at the margin with 10-year rates ending the local session unchanged at 4.22%.
10-year government bonds underperformed swaps closing 3bp higher at 4.68%. The bond market looks ahead to the weekly tender today. There will be NZ$500 million of bonds being offered by New Zealand Debt Management split across the Apr-27 ($250m), May-34 ($200m) and May-41 ($50m) maturities. There will also be $30 million of the Sep-35 inflation indexed bonds offered. Breakevens are towards the bottom end of the albeit narrow range that has prevailed for past few months and should support demand.
The minutes for the January FOMC are released soon after we go to print this morning. There is no domestic data of note in the day ahead. Labour market data is scheduled in Australia. The unemployment rate is expected to edge higher to 4.1% from 4.0% in January. Initial jobless claims and the Philadelphia Fed business outlook survey are released in the US.
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