US equities retreated from 2023 highs on Friday, but the S&P still added more than 2.5% over the week with global stock indices also making solid gains. The Nikkei closed at a new 33-year high. US Treasury yields are higher, and the US Dollar was stable against most currencies except for the Yen which fell following the Bank of Japan decision to leave monetary policy settings unchanged.
The Bank of Japan remained an outlier amongst global Central Banks by leaving the policy rate unchanged at -0.1%, and the yield curve target for 10-year bonds at 0.0%, at Fridays meeting. Policy makers continue to expect that inflation will fall over coming months. The Yen fell in the aftermath of the decision, with the reprieve provided by Governor Ueda, when he refused to rule out the possibility of a policy change at the July meeting, only providing temporary support. The Yen hit 7-month lows against the US Dollar and is at the weakest levels in 15-years against the Euro. Japan’s finance minister had commented earlier that they ‘continue to closely watch’ the FX market and that ‘excessive moves are undesirable’ but USD/JPY is still some way from the 146 levels where the BOJ last intervened in 2022.
In the US, University of Michigan consumer sentiment increased more than expected with both current and expectations components both beating forecasts. However, the improvement largely reverses the decline from May and overall sentiment remains at depressed levels. Five-to-10-year inflation expectations dipped to 3.0% from 3.1%, following two straight increases which is still too high for the US Federal Reserve (Fed). One-year inflation expectations fell sharply to 3.3% in June, from 4.2%, leaving them well below the peak of 5.4% in April last year.
US treasury yields moved higher Friday night with 2-year yields again moving above 4.75% and close to the highs reached after the FOMC earlier in the week. Speeches by Fed officials contributed to the move in Treasuries. Fed Governor Waller said the elevated level of core inflation was probably going to require some more tightening and Richmond Fed President Barkin said he was ‘comfortable doing more’ if inflation failed to return to lower levels. The market is currently pricing about a 70% chance of the Fed rate hike at the July meeting. In a continuation of the recent trend, 10-year yields lagged the move in front end with the curve inverting further to -95bps.
European bond markets were little changed albeit after a substantial move higher in yields over the past week. 10-year bunds were 3bps lower at 2.47% and 10-year Gilts added 3bps to 4.4%.
Outside of the moves in the Yen, currency markets were largely subdued into the weekly close. NZD/USD dipped marginally towards 0.6215 before recovering to be near unchanged. The NZD was broadly stable on most crosses. However, NZD/JPY continued the recent uptrend and traded above 88.00 which is the highest level since 2015.
NZ fixed income markets opened lower in yield on Friday then retraced some of the move through the local session before ending 2-3bps lower in yield. Australian 3 and 10-year bond futures yields were little changed Friday night while the move higher in US rates suggesting a modest upward directional bias for NZ rates.
The economic calendar is quiet to start the week and US markets are closed for the Juneteenth public holiday. The focus domestically will be the release of the services purchasing manager index (PMI) which dropped sharply to a sub-50 reading last month. The main events during this week are Fed Chair Powell’s testimony to US lawmakers and the release of advance PMIs for Europe and the US. In the UK, inflation data is released ahead of the Bank of England monetary policy meeting where rates are expected to increase by 25bps to 4.75%.
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