US equities extended the recent rally despite weak consumer sentiment data and cautious comments Fed Chair Powell. Moody’s lowered its outlook on the US’s credit rating to negative from stable

US equities extended higher on Friday with the S&P moving back above the 4,400 level. The index is more than 7% above the late October low point. Weaker than expected consumer sentiment and earlier comments by Fed chair Powell, that the central bank won’t hesitate to tighten policy further if needed to contain inflation, failed to undermine the positive risk sentiment. Treasuries and the US dollar were confined to narrow ranges. Oil prices gained 2% reducing the weekly fall to 4%.

Moody’s lowered its outlook on the US’s credit rating to negative from stable just ahead of the US close. The agency said that downside risks to the US’s fiscal strength have increased and pointed to a sharp rise in debt servicing costs and ‘entrenched political polarisation’. Moody’s is the only major credit agency that maintains a AAA rating for the US.

University of Michigan consumer sentiment fell to 6-month low and undershot economists’ expectations by some margin. The director of the survey pointed to a combination of persistently high prices, high borrowing costs, and labour market weakness for the decline in sentiment which does not bode well for continued strength in consumer spending.

Within the survey, consumers expectations of 5-10 year ahead inflation increased to 3.2% from 3.0% last month. This is a new cyclical high for the series and expectations have risen 0.4% in the past two months. The increase is likely related to the move higher in oil prices, which have since retraced, but the Fed will be watching expectations closely given fears the fall in inflation could stall.

GDP flatlined in the UK in Q3 which was marginally above consensus estimates for a small decline. Consumer spending, business investment and government spending all fell leaving trade to provide support. The Bank of England expects the economy to stagnate over the next year. While policy makers have stressed that borrowing costs need to remain in restrictive territory, market pricing implies that the tightening cycle is complete with the policy rate at 5.25%. CPI data is released later this week.

The Reserve Bank of Australia Statement on Monetary Policy (SoMP) suggested a reluctance to hike rates further despite upgrading its inflation forecasts. The RBA considered both the argument to hike and to hold at the November meeting. The SoMP outlined that further tightening to ensure that inflation returns to target in reasonable timeframe will depend upon the data and the evolving assessment of risks.

An initial move lower in US treasury yields reversed following the upside surprise to long-term inflation expectations. 2-year yields reached a low of 4.97% before closing up 4bps at 5.06%. 10-year treasuries lost ground after the news about the US credit rating outlook and closed up 3bps at 4.65%.

It was a quiet session in currency markets with the dollar index confined to a narrow range in directionless trade. The standout performer within G10 currencies was the Norwegian Krone following data that showed underlying inflation picked up for the first time in four months. NZD/USD oscillated around 0.5890 to end little changed and was stable on the cross rates.

NZ government bond yields moved higher in the local session on Friday reflecting the moves in offshore markets. 10-year government bond yields increased 12bps to 5.12%. The yield curve had a modest steepening bias with 5-year bonds up 9bps. The 10y/30y curve flattened to 8bps despite NZDM announcing it will be tendering into the May 2051 maturity on Thursday. Australian bond futures are close to unchanged from the local close on Friday, suggesting limited directional bias for NZGBs on the open.

The Performance of Services Index for October is released today. The index rebounded to 50.70 last month after spending 3 consecutive months below 50. The Performance of Manufacturing Index slipped further into contractionary territory on Friday. There is no data of note on the international calendar today.