Strong rebound for US equities. But US consumers' long term inflation expectations reached the highest level since 1993 while sentiment slumped. Euro gains after after a deal for massive German fiscal expansion

Investor risk appetite recovered into the end of last week. After the S&P had previously entered a correction, following the 10% fall from its February peak, the index rebounded strongly and closed the session 2% higher. The announcement of a deal by German politicians to proceed with a massive fiscal expansion supported European stocks. Chinese equities also advanced, led by consumer shares. Policy makers have outlined steps to boost consumption. US treasury yields moved higher while the US dollar was broadly weaker against G10 currencies.

Germany’s chancellor-to-be Friedrich Merz has reached a deal with the Green party to proceed with on a debt funded spending package for infrastructure and the military. The agreement will proceed to a vote in parliament this week. The euro gained and bund yields moved sharply higher initially. 10-year yields, reached an intra-day high of 2.94%, matching the recent peak, before retracing to close at 2.88%.

US consumer sentiment fell to a preliminary reading of 57.9, well below consensus estimates. It was the third consecutive monthly drop and the lowest reading since November 2022. Economic policy uncertainty and the pullback in equity indices have undermined confidence amongst consumers. There was a large fall in the expectations component, which has a closer relationship with spending, than the headline index.

Within the report, consumers’ inflation expectations increased sharply, reflecting the implementation of tariffs, and with the likelihood of more to come. There was a further rise in the five-to-ten-year inflation expectations which increased to 3.9% from 3.5%, the highest level since February 1993. Recent data has pointed to a slowdown in activity, but Fed policymakers may be reluctant to ease monetary policy while tariffs are contributing to a rise in inflation expectations.

Accordingly, the market pared expectations for Fed rate cuts. There is now 65bp of easing priced by the December FOMC. This compares with 72bp ahead of the data and a peak last week, amid weak risk sentiment, of 90bp of easing by year end. US treasury yields moved higher across the curve with a modest flattening bias. 10-year yields closed at 4.31%, 4bp higher.

In currency markets, the US dollar was broadly weaker against G10 currencies. The euro was supported by the fiscal developments in Germany while the positive risk tone underpinned growth sensitive currencies like the NZD and AUD. NZD/USD traded steadily higher, and back towards the top end of the range during March, in the 0.5750/60 region. The NZD made gains on all the major cross rates.

Gold prices traded above US$3000 per troy ounce for the first time and extended gains over the past twelve months to nearly 40%. The move higher has been underpinned by ongoing central bank buying to diversify reserves and safe haven flows given the uncertain macro backdrop.

The manufacturing PMI in NZ advanced further into expansionary territory in February supporting expectations that the economic recovery is taking hold. At 53.9, the index is above its long term mean and all the sub-index values were in expansion territory.

Inflation partials for February were marginally higher than our baseline assumptions as fuel prices didn’t retrace as much as we had expected. This could be a timing issue and suggests modest upside risks to our 2.3% forecast for Q1 annual headline CPI. This compares with the RBNZ’s 2.4% projection from the February Monetary Policy Statement.

NZ swap rates edged higher in the local session on Friday. 2-year swap rates closed 2bp higher at 3.48% with the curve marginally flatter. The 2y10y curve traded below 70bp having reached a cyclical peak of 76bp during last week. There was limited activity in the government bond market. 10-year bonds were unchanged at 4.66%.

Australian 10-year government bond futures are 3bp higher in yield terms since the local close on Friday, suggesting a modest upward bias, for NZ yields on the open.

The services sector PMI is the only domestic data of note today. The index edged above 50 in January. China releases monthly activity data covering industrial production and retail sales. Retail sales data is also scheduled the US and are expected to rebound after the very weak January print.