The yen has strengthened and JGB yields moved sharply higher following Bank of Japan signals of an exit from their large-scale stimulus and negative interest rates

US equity markets gained, and treasury yields retraced from an earlier move higher as investors look ahead to key data on the US labour market. The US dollar was broadly weaker, and the yen advanced to its strongest level since August following hawkish comments by Japanese policy makers. Oil prices were little changed after touching a five-month low earlier in the week with the market unconvinced that OPEC+ production will be sufficient to boost prices.

German industrial production fell for the fifth consecutive month and follows weak factory orders yesterday. Industrial production fell 0.4% m/m compared with consensus estimates for a 0.2% gain. The German economy is struggling to gain traction amid soft global demand. The economy contracted 0.1% q/q in Q3 and is forecast to record another modest decline in the December quarter.

US initial jobless were in line with expectations at 220k. Continuing claims, a proxy for people receiving unemployment benefits, pulled back but remain elevated. The levels of continuing claims suggest it is harder to find new employment for those who have lost their jobs. This aligns with the Conference Board consumer confidence survey where a rising proportion of respondents note that jobs are becoming harder to get.

The yen strengthened and JGB yields moved sharply higher following Bank of Japan (BOJ) governor Ueda’s semi-annual testament to parliament where he discussed potential exit options from the bank’s large-scale stimulus and negative interest rates. Yields on 10-year JGBs increased by 12bps to 0.75%, the largest one day move in a year and market pricing indicated a higher chance the BOJ will end its negative interest rate policy later this month. A 30-year JGB auction yesterday had the lowest bid-cover ratio since 2015.

US treasury yields moved higher in early European trade aligned with the move in JGBs. 10-year treasury yields reached session highs of 4.18% but have since retraced towards 4.12%. 2-year treasury yields are little changed near 4.58% as the market consolidates recent large falls in yield ahead of the US payrolls report this evening.

In currency markets the US Dollar made broad based losses. The dollar index fell 0.5% with the yen strength having the largest impact. USD/JPY has fallen more than 2.5% to 143.50 which may have been exacerbated by large speculative short yen positioning. The NZD and AUD were among the stronger performers within the G10 while European currencies only made modest gains against the dollar. NZD/USD traded to a high near 0.6170 having recovered off the weekly lows reached yesterday afternoon near 0.6115. NZD/JPY fell to 88.90 and NZD/AUD is marginally lower at 0.9350.

NZ fixed interest markets were little changed in the local session yesterday underperforming on a cross market basis against the US and Australia. 10-year government bond yields closed at 4.83%, unchanged from the previous day, while short end bond yields increased 2-3bps.

The weekly government bond tender saw NZ$1.2 billion in bids for the NZ$500 million on offer. The April 2027 maturity was offered for the first time since October and received tepid demand with a 1.4 bid-cover ratio. There was stronger appetite for the May 2031 and April 2037 maturities which achieved bid-cover ratios above 3.

Australian bond futures are little changed since the local close yesterday suggesting a limited directional bias for NZGB yields on the open.

The focus into the end of the week will be the US labour market data. Non-farm payrolls are expected to increase 185k underpinned by a rebound associated with auto workers returning from strike. Consensus estimates are for the unemployment rate to remain unchanged at 3.9%. Michigan consumer sentiment should improve given falling gas prices and the rally in US equities while 5 to 10-year inflation expectation, which unexpectedly rose to 3.2% in November, is expected to retrace.