Global markets were generally subdued into month-end after large losses for bonds and equities during September. Further signs of easing price pressures in the US and Eurozone

Global markets were generally subdued into month-end. Early gains in US equities faded with the S&P ending little changed on the day. The S&P fell more than 5% in September amid concerns about monetary policy remaining at restrictive levels for a longer period. Global bond yields fell on Friday, aided by signs of easing inflation in the Eurozone and the US, but ended the month with large losses.

The US Dollar retraced an earlier fall while Brent crude prices were little changed near US$95 per barrel having gained close to 10% during September.  Over the weekend US lawmakers passed a last-minute compromise funding measure with bipartisan support, to avert a shutdown of the US government. The legislation will keep the government running till November 17.

US PCE inflation data, which is closely watched by the Federal Reserve, came in a little below consensus on headline and core monthly measures. Annual changes were in line with expectations due to revisions to previous months. Headline inflation increased 3.5% y/y, up from 3.4% in July, due to higher gas prices. Meanwhile core prices slipped to 3.9% y/y from 4.3% in July, which is the lowest level since September 2021.

New York Fed President John Williams suggested the US central bank may have completed the hiking cycle though cautioned that policy makers will need to keep rates high for some time. He said the US central bank is ‘at, or near, the peak level’ of its benchmark interest rate now that price pressures have eased more notably. Futures markets continue to price about 10bp of tightening across the remaining 2 Fed policy meetings for this year.

Inflation in the Eurozone has fallen to its lowest rate for almost two years. Headline consumer prices increased 4/3% y/y in September down from 5.2% the previous month. Core inflation increased 4.5% y/y. Both measures were lower than consensus forecasts though the market had earlier digested lower regional releases. The data contributed to a rally across European bond markets with 10-year bunds closing down 9bp to 2.83% having reached the highest level (2.98%) since 2011 on Thursday.

US treasuries were marginally lower in yield across the curve with 2-year bonds down 2bp to 5.04% while 10-year bonds closed little changed at 4.57%. The small steepening bias saw the 2y/10y curve close at the steepest level (-46bp) since May and some distance from the maximum curve inversion of -110bp seen in July. An earlier move lower in yields following the below consensus European inflation data faded despite supportive US data. The 7-10 year treasury sector returned -3.1% in September, the worst loss in since August last year.

Japanese policy makers continue to comment on the Yen. Finance minister Suzuki said Japan has not set up a ‘defence line’ with reference to USD/JPY levels but are focussing on the ‘speed of currency moves’. Currency markets remain on alert for intervention as USD/JPY trades towards the psychological 150 level. The Bank of Japan announced an unscheduled bond buying operation as 10-year JGB yields reached new highs for the cycle near 0.77% but volumes were not large.  10-year bonds ended the session 1bp below the highs at 0.76%.

The US Dollar slipped in early Europe trade on Friday night with the dollar index down close to 0.5% at the lows before rebounding to end little changed. While there was no apparent catalyst, price action matched that of equities with the dollar gaining as the S&P retraced from the session highs. The Canadian dollar underperformed within the G10 currency grouping following softer than expected GDP data.

NZD/USD initially extended the gains from the local session on Friday and traded to the highest level in almost 2 months up towards 0.6050. The recovery in the US Dollar off the lows saw NZD/USD slip back below 0.6000 but the NZD outperformed within the dollar bloc making gains against the AUD and CAD. NZD/AUD traded back above 0.9300 and ended the week near 0.9320.

NZ government bond yields reached new highs for the cycle in the local session on Friday. 10-year bond yields increased 6bp to 5.31%, the highest level since 2011. Shorter maturities outperformed with the 2y/10y government curve steepening to -43bps which is the least inverted since April. Bonds outperformed relative to swaps which increased 9bp in 10-year maturity. Australian 3-year and 10-year bond futures are close to 5bps lower in yield from the local close on Friday suggesting a downward bias for NZ yields to start the week.

Dwelling consents for August is the only local data today. The regional focus in the week ahead will be monetary policy meetings for the RBNZ (Wed) and RBA (Tues) where both are expected to leave rates unchanged. In the US, the release of manufacturing and services ISM surveys as well as labour market data will be the focus.