US equities gained and treasury yields increased after US labour market data was stronger than expected in November. The S&P advanced 0.4% for its sixth consecutive week of gains and closed above 4600 for the first time in 2023. Higher treasury yields supported the US dollar. Oil prices rebounded from 5-month lows and were underpinned by news that the US intends to refill its Strategic Petroleum Reserve.
Nonfarm payrolls increased 199k. This was marginally above consensus estimates of 185k and there were downward revisions of 35k for the previous two months. The return of striking auto workers helped boost payrolls by 30k. The unemployment rate fell to 3.7% from 3.9% last month which was below every economist’s estimate. Average hourly earnings increased 0.4% m/m, above the consensus of 0.3% and the annual rate declined to 4.0%, unchanged from October.
The market reduced expectations of a near term rate cut by the Federal Reserve in response to the labour market report. The probability of a cut at the March FOMC declined below 50% although a full 25bps cut is still priced for the May meeting. The Fed is almost certain to leave rates unchanged at this week’s FOMC and the market will focus on the Fed’s messaging and updated summary of economic projections.
US consumer confidence jumped in November, easily beating median estimates. University of Michigan consumer sentiment increased to 69.4 relative to the expected level of 62. The pullback in gas prices and stronger equities are contributing to the improved sentiment. Within the report, 5 to 10-year inflation expectations fell sharply by 0.4% to 2.8%. Expectations had increased to 3.2% in October, a cyclical high, but looked unsustainable given its sensitivity to current inflation levels which have retraced a long way.
China CPI fell 0.5% on an annual basis in November which was a larger decline than expected. It is the biggest drop in 3 years. PPI declined 3% against expectations for a 2.8% fall. The economy has experienced deflationary pressures for much of 2023 amid weak domestic demand. There are indications that fiscal support will increase to support the economic recovery.
US treasury yields moved higher following payrolls led by the front end. 2-year yields ended the session up 12bps at 4.72%. The curve bear flattened with 10-year yields increasing 8bps to 4.22%. The 2y/10y curve has flattened since the end of October with the longer end outperforming amid the move lower in yields. The market looks ahead to US$108 billion of coupon supply this week comprising 3,10 and 30-year securities in a compressed schedule given the Fed meeting.
The US Dollar made broad-based gains following the data with the dollar index (DXY) increasing 0.4%. After 3 consecutive weeks of losses, the DXY made a weekly gain of close to 0.6%. The Yen was among the weakest currencies in the G10 with USD/JPY ending the week just below 145.00 having traded to 142.50 lows in Asia. NZD/USD fell to session lows near 0.6105 following payrolls before making a modest recovery to 0.6120 into the close. NZD/AUD traded down towards 0.9300.
NZ government bond yields ended the local session on Friday higher in yield. 10-year bonds increased 5bps to 4.88% in the absence of domestic drivers. Interest rate swaps underperformed bonds with 10-year swap spreads widening 3bps. Australian 3 and 10-year bond futures are about 5bps higher in yield from the local close on Friday, and combined with the move in US treasuries, suggest an upward bias for NZGBs yields on the open.
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