US equities staged a late-session rally on Friday to close 1.6% higher and edge back to positive returns for 2025. The market rebound was set against several macro cross currents including rising geopolitical tensions between the US and Ukraine, soft US consumption data and further developments on trade policy. Treasury Secretary Bessent said that Mexico had proposed matching US tariffs on China and urged Canada to do the same. US treasuries rallied and the US dollar closed higher.
Real personal spending fell more sharply than expected in January, despite a rise in income, suggesting greater caution by US consumers. The pullback in spending was largely attributable to vehicle purchases. Although vehicle sales are expected to recover in February, aggressive government policy changes have weighed on consumer sentiment which could form a headwind going forward.
The 0.3% rise in the core PCE deflator matched consensus expectations. The annual rate dipped to 2.6% which was the lowest rate since 2021. Some analysts are pointing to potential residual seasonality in January which may be overstating the underlying inflation pressures. The Fed’s preferred inflation gauge would be expected to further converge towards the central bank’s target this year but uncertainty on tariffs complicates the outlook.
The US trade deficit surged to US$153 billion in January, well above consensus estimates, and likely reflects tariff front-running. Exports rose by 2.0%, so the wider deficit resulted from the 11.9% increase in imports, with net trade expected to weigh on GDP.
US treasuries rallied following the data. 2-year yields dipped below 4.0% for the first time since October as the market priced additional easing by the Fed. Fed funds futures imply the first 25bp rate cut by the June FOMC and a total of 68bp by year-end. 10-year treasury yields closed 5bp lower at 4.21%.
10-year bunds were little changed at 2.40%. Short end yields moved higher after German harmonized CPI was marginally above the consensus estimate but there was limited lasting market impact. S&P have put France on negative outlook due to rising government debt and weak political consensus to tackle fiscal consolidation.
Inflation in Tokyo, which is considered a leading indicator for the nationwide reading, slowed more than expected in February. However, underlying inflation is broadly holding steady, and the Bank of Japan is likely to continue considering rate hikes to reach a neutral level. There is about 25bp of tightening priced by the end of this year.
The US dollar gained after a public disagreement between President Trump and Ukraine President Zelenskiy which cast doubts about the peace process. The euro fell below 1.04. USD/CAD dropped to its session lows after Q4 GDP was stronger than expected but the move wasn’t sustained.
After falling in the local session on Friday, NZD/USD was marginally weaker in offshore trade, and closed the week below 0.5600. The NZD was little changed against most G10 crosses except for NZD/JPY, which recovered from multi-month lows near 83.70, to trade back above 84.00. CFTC data revealed speculative accounts have reduced long US dollar holdings by US$8 billion in the week to last Tuesday. Long positions in the yen have reached a record.
NZ filled jobs increased 0.3% in January driven by a solid gain in service sector positions. However, revisions to this series have been consistently lower since the beginning of last year. Overall, it does appear filled jobs will show some improvement this year albeit from a low base.
NZ fixed income moved sharply lower in the local session on Friday amid weak risk sentiment. A pickup domestic mortgage book pay-side activity was more than offset by flow from macro funds. Swaps closed the session 6-7bp lower across the curve. Government bonds outperformed with a largely parallel curve shift 9bp lower. 10-year bonds at 4.59% and outperformed on a cross-market basis against Australia.
Australian 10y bond futures are little changed since the local close on Friday, which suggests a limited directional bias, for NZ yields on the open.
NZ releases terms of trade data for the December quarter today. In the Euro area, headline inflation is expected to decrease to 2.3%, from 2.5% in January, with the core measure expected to decline to 2.6%. The manufacturing ISM is scheduled in the US and will be monitored to see the extent which the US administrations policies are weighing on the business sector.
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