Markets take a breather from recent trends - US Treasury yields down slightly, US equities up modestly. EU and UK agree a new trade deal regarding Northern Ireland, paving the way for better relationship

It has been a typically quiet start to the week, with modest market movements after the recent carnage seen in the bond market. US Treasury yields are down a touch and US equities are modestly higher. GBP has slightly outperformed after the UK and EU agreed a new trading deal with respect to Northern Ireland. The NZD is little changed around 0.6160.

As month-end approaches, the US Treasury market shows signs of consolidation after the big selloff seen through February on the repricing of US monetary policy expectations. The 2 and 10-year rate are down 1-2bps from Friday’s close, with the 10-year rate at 3.93% – the latter still showing resistance just under 4% after a failed attempt to push any higher than 3.98% overnight. After last week’s 2.7% fall in the S&P500, the largest for the year, the equity market has begun the week on a more positive note, showing a modest lift.

In economic news, durable goods orders fell by a larger than expected 4.5% m/m in January, dragged down by aircraft orders.  The ex-transportation measure rose a stronger 0.7% m/m, following a downwardly revised 0.4% m/m fall in December. The underlying trend remains soft and more so in real terms after accounting for high inflation.  US pending home sales surged 8.1% m/m in January, another indicator likely over-inflated by the warm winter and lower mortgage rates over late 2022 which have since sharply reversed.  Contracts were still down over 22% y/y, even with the surge in January.

Euro area economic confidence was little changed at 99.7 in February against expectations for another modest lift.

The only notable news overnight was the UK and EU agreeing on a new trading arrangement for Northern Ireland, which has been a major sticking point in the post Brexit environment over recent years. The agreement, which softens the Northern Ireland protocol as part of the 2019 Brexit deal, will reduce trade issues between Britain and Northern Ireland, the latter which has effectively remained in the EU single market following Brexit. A signed deal would also reduce tension between the UK and EU. The finer points of the deal haven’t been made public and the next step is for UK PM Sunak to sell the agreement to his Eurosceptic MPs and unionists in Northern Ireland, with the mood music positive at this stage.

The reaction of GBP has been modest but the currency has outperformed, gaining 0.8% to 1.2040, the restrained move reflecting some recent anticipation of reaching a deal and no final sign-off just yet. There has been some positive spillover in EUR, up 0.5% to just under 1.06. NZD and AUD have tracked sideways and show little net movement for the week, the NZD unchanged near 0.6160 and the AUD at 0.6730.  NZD/GBP has fallen to 0.5120 and NZD/EUR is down to 0.5820, with smaller moves on the other key crosses.

Yesterday, NZ Q4 retail sales data showed strong nominal growth in sales and weak real growth, as higher inflation boosted the former and ate into spending power, deflating the latter. Real sales contracted 0.6% q/q adding to other evidence of a weak end to last year for economic activity, but with timelier January activity data suggesting a better start to Q1, at least prior to cyclone Gabrielle struck.

The domestic rates market saw upside pressure in yields from the open, reflecting higher global rates seen Friday night. NZGB yields were 3-4bps up across the curve.  There were slightly larger moves in the swaps market, with the 2-year rate up 6bps to 5.44%, its highest closing level since 2008, after surpassing the late-December closing high. The 10-year swap rate closed 5bps higher at 4.71%.

In the day ahead, the ANZ business outlook survey will capture the impact of the Auckland floods of late January. Pricing indicators are likely to remain strong and will likely remain so when the next survey captures the impact of cyclone Gabrielle. Australian current account and retail sales data follow. Tonight sees the release of trade, Chicago PMI and consumer confidence data in the US and Canadian Q4 GDP.