On Friday there were only small changes in equities, rates and currencies, ahead of a very busy event calendar in the week ahead.
The US S&P500 was up 0.25% on Friday, taking its weekly gain to 2.5% while the Nasdaq index rose just under 1% for a weekly gain of 4.3%, the latter supported by some support for tech stocks and Tesla’s 33% gain over the week, with the company delivering on an anticipated strong result.
Despite fears of how the earnings season might pan out, given the soft economic backdrop and relatively exuberant earnings expectations, the strong 6% gain in the S&P500 and 11% gain in the Nasdaq index so far this year shows that despite a mixed earnings season so far, the theme of weaker inflation and an imminent pause in the Fed’s tightening cycle are top of mind for investors. The VIX index closed the week at 18.5, taking our risk appetite up to a nine-month high of 54%.
Second-tier US data released Friday night showed real consumer spending lost momentum through the December quarter, down 0.3% m/m in December following the 0.2% fall in November. On the inflation narrative, the core PCE deflator was up 0.3% m/m in December, taking the annual increase down to 4.4%, the weakest rate in over a year – the mix showing this driven almost entirely by the goods sector, with services inflation remaining strong. The final readings of the University of Michigan inflation expectations series showed the 1-year figure down to 20-month low of 3.9%, while the 5-year figure nudged down to 2.9%.
US Treasury yields were fairly well contained on Friday, with little net change for the 10-year rate on the day and closing the week at 3.50%, at its low for the overnight session and a few basis points below the level at the NZ close. Former Treasury Secretary Summers told Bloomberg news that the Fed should “maintain maximum flexibility” at the upcoming meeting, not committing to rate hikes and at the same time the possibility of further rate increases shouldn’t be taken off the table.
In Japan, Tokyo CPI inflation surged further ahead to 4.4% y/y to a new four-decade high while the core figures also showed stronger underlying inflation pressure. The data provide an early steer on the nationwide figures and the strong print continues to play to the theme that the BoJ may soon be forced to abandon its ultra-easy policy stance – evidence that higher inflation will prove transitory remains absent. The data gave some support to the yen, but not much. Under its current policy stance, the BoJ’s ramp-up in JGB buying will need to continue, with the 10-year rate hovering just 1bp below the 0.50% desired limit.
Currency markets showed little net movement on Friday. The NZD spent most of the day (and week) hovering just under 0.65 and closed the week just under that level. The AUD was flat at just over 0.71 and was the key winner over the week, with a 2% gain, supported by the stronger CPI print mid-week driving higher Australia-global rate spreads.
The NZ ANZ business outlook survey showed some recovery in activity indicators from the disastrous December survey while the inflation indicators remained robust, with pricing intentions pushing higher, with a net 62% of businesses intending to increase prices, still too high for comfort against a historical average closer to 25%.
Rainfall in Auckland on Friday night of biblical proportions, with more to come this week, will add both supply-side and demand-side pressures for the region, a source of additional inflation pressure over the months ahead.
NZ rates reversed course on Friday, with some curve flattening pressure in the swaps market (2-year up 8bps, 10-year up 4bps) and NZGBs up 4-6bps across most of the curve. While slightly higher global rates played some role it was also probably a case of the post-CPI rally getting somewhat stretched. Labour market data on Wednesday will be the last key figures ahead of the RBNZ’s MPS on 22 February, which might ultimately determine whether the market sways more towards a 50bps hike or 75bps hike, OIS pricing nudging back up to 4.86% on Friday or an implied hike of 61bps.
Globally, after a quiet start, it’s a massive week on the calendar with China PMIs, Euro area GDP and CPI, US ISM manufacturing and services, employment cost index, JOLTs report and culminating in the employment report at the end of the week. Add to that more key earnings reports including those of Apple, Alphabet, Meta and Caterpillar. And throw into the mix, policy meetings of the Fed, ECB, and BoE.
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