The US Treasury curve steepened, with the 2-year rate down 4 bps to 1.31% and the 10-year rate down 1 bp to 2.15%, driven by the softer data.
It is likely that further Fed tightening from here requires a positive turnaround in the dataflow, particularly inflation. The market is not positioning itself for this, with CFTC data showing that net speculative positioning in 10-year futures is now the longest in ten years.
Citigroup’s US economic surprise index has plunged further after last week’s barrage of soft indicators and now sits at its lowest level in nearly six years. This highlights just how one-sided the economic data flow has been over the past few months.
The treasury market would be vulnerable to a quick positive turnaround in the dataflow, possibly seeing a jump higher in yields if that occurred.
The local rates market on Friday saw higher yields across the curve. This largely reflected the move higher in US rates from the previous NZ close.
The fact that the US Fed, Bank of Canada and Bank of England all came out with hawkish surprises last week also got the market’s attention.
Some took that as a warning sign that the mood of global central bankers was changing. It gives some food for thought about the outlook for policy from here. NZ’s 2-year swap rate closed up 2.5 bps to 2.19% while the 10-year swap rate closed up 4 bps to 3.15%.