US Treasuries reverse course, with 10-year rate up 10bps on the day following yesterdays 19bps drop. US data consistent with soft landing, disinflationary narrative; retail sales soft but better than expected, while PPI much weaker than expected

Following yesterday’s substantial decline, US Treasury yields have reversed course, seeing the 10-year rate up 11bps from the NZ close. This followed data showing slightly stronger than expected retail sales but much weaker PPI inflation. Higher rates haven’t got in the way of further upside in US equities, while currency movements have been mainly modest overnight and the NZD has consolidated over the 0.60 mark.

The expert commentary around yesterday’s massive 19-22bps drop in US Treasury yields for 2 to 10-year rates after a small downside miss in the CPI was that the market had over-reacted. That view has proven to be correct, with yields reversing course overnight after the risk events of the day – the US retail sales and PPI reports – were out of the way, even though with the focus on inflation, the much weaker than expected PPI print might have ordinarily seen lower yields on the day.

Rates are higher across the curve, with the 2-year rate up 8bps to 4.92% and the 10-year rate up 9bps to 4.54%, both just shy of their highs for the session and the latter up 11bps from the NZ close. The move has spilled over into European rates, albeit not to the same extent, with Germany’s 10-year rate up just 4bps on the day.

US economic data were mixed but consistent with the soft-landing narrative and weaker inflationary pressure. Retail sales were slightly stronger than expected and with upward revisions to prior data, with tepid growth of 0.1% m/m in the ex-autos and gas measure following 0.8% m/m growth in September. Hot on the heels of yesterday’s downside CPI miss, PPI inflation was also weaker than expected, substantially so, with headline PPI falling 0.5 m/m in October and flat excluding food and energy, the latter three-tenths below the consensus. The NY Fed’s Empire manufacturing index surprisingly rebounded from minus 4.6 to plus 9.1, but the survey had a weaker underbelly, with weak new orders and employment indices and signs of higher inventories.

After the 1.9% gain in the S&P500 yesterday, the market has consolidated, not minding the soft-landing narrative, although higher rates have seen the market pull back off its highs and the index is now only up 0.3% in early afternoon trading.

Currency movements have been mostly modest, although GBP has underperformed and is down 0.6% overnight to 1.2420, following slightly weaker than expected inflation data. UK annual CPI inflation fell sharply to a fresh two-year low of 4.6% y/y in October, from 6.7%, due to favourable base effects and core inflation fell to 5.7%, down from 6.1%. The data support the widespread view that the BoE is finished tightening this cycle. EUR is also on the weaker side of the ledger, down to 1.0850, alongside the yen, against the backdrop of higher global yields, seeing USD/JPY climbing back over 151. These moves see the USD DXY index up 0.2%, following the chunky 1.5% fall yesterday, its largest daily drop for 2023.

The NZD and AUD have outperformed, with some better China activity data – or less weak than feared – providing some support to the yuan. China monthly activity data showed a welcome positive surprise for retail sales, with annual growth at a five-month high of 7.6%, even if inflated by last year’s COVID lockdown. However, the data also showed a slump in investment, with the property sector remaining a clear drag on the economy.

The NZD showed a spike up to 0.6054 in the aftermath of the US data releases, close to the resistance level we have previously noted, being around the October high, and it has consolidated near the 0.6030 level. NZD/AUD traded above 0.9280 last night before reversing course and it currently sits at 0.9250, down slightly from the NZ close, with AUD higher at 0.6515. Yesterday, Australian wage inflation data were broadly in line with market and RBA expectations, running at a 14-year high of 4% per annum.

The relatively weak yen sees NZD/JPY push above 91, a fresh eight-year high, while NZD/GBP is up over 1% from this time yesterday to 0.4855.

NZ electronic card transactions data extended their run of patchy to negative results, consistent with very weak spending and a world of pain for retailers, amidst historically low levels of consumer confidence. Remarkably, contracting sales growth is also amidst booming net migration, with a record 119k annual inflow adding to strong 2+% population growth, and painting a picture of even weaker demand growth when considered on a per capita basis.

Domestic rates were dragged down by the large fall in Treasury yields in the aftermath of the soft US CPI report, seeing NZGB yields down a chunky 15-16bps across most of the curve, with a smaller 11-12bps fall in the ultra-long bonds. This saw the 10-year rate close below 5% for the first time in two months and fully unwind the lift seen late last week and earlier this week. Swap rates were down 15-17bps, with the 2-year rate at 5.19%, its lowest close since late-May. Remarkably, the OIS curve still prices a small chance (4bps) of a rate hike later this month, while the first full easing isn’t priced until Q3 next year, suggesting further downside risk to short-term rates relative to our base view of no more tightening and a likely earlier start to the rate cutting cycle. However, that risk will have to wait another day, given the overnight moves, and the Australian 10-year bond future is up 8bps in yield terms since the NZ close, and that will set the tone for trading as the NZ trading day begins.

In the day ahead REINZ housing market data are released, ahead of Australia’s employment report, where the consensus sees employment growth not strong enough to prevent a tick higher in the unemployment rate to 3.7%. Only second-tier US data are released tonight, alongside a number of Fed speakers, including NY Fed President Williams.