US equities made modest gains on Friday in the absence of first-tier economic data or other market drivers. The S&P ended up 0.1%, and consolidated above 4,500, having advanced close to 2% during the week. US investment grade credit spreads were little changed, and are close to the tightest levels for 2023, after the recent strong performance in risk sensitive assets. The US dollar was weak across the board and 10-year US treasuries were stable.
News that Saudi Arabia is preparing to extend production cuts into next year, alongside potential supply cuts by other OPEC+ members, contributed to a recovery in oil prices. Saudi Arabia and Russia had already agreed to keep output cuts in place till the end of the year. Brent crude had fallen to 4-months lows below US$77 per barrel in part due to stronger than expected non-OPEC production alongside concerns about slowing global growth.
The pace of new home construction in the US unexpectedly increased in October. Residential housing starts increased at a 1.37 million annualised rate. While high interest rates are impacting demand, the limited listings of existing houses is providing support for new construction. Building permits rose 1.1% to 1,487K.
UK retail sales dropped unexpectedly in October. Sales excluding fuel slipped 0.1% m/m against expectations for a 0.5% rise. This is a further indication that the 14 consecutive rates hikes, which pushed the base rate up to 5.25%, is placing pressure on households. There are an estimated 1.6 million mortgages to be refinanced at significantly higher rates next year according to Bloomberg calculations. Market pricing implies that the Bank of England tightening cycle is complete and the bank will begin to ease policy from the middle of 2024.
An initial move lower in US treasury yields reversed with the stronger than expected housing construction data providing a boost to front end yields. 2-year treasuries reached a low of 4.8% before ending 5bps higher at 4.89%. The curve flattened with the 10-year bonds unchanged on the day at 4.43% despite a temporary dip below 4.4%. There will be a US$15 billion auction of a new 20-year treasury tomorrow morning (NZT).
Gilts outperform in European bond markets following the weaker then expected retail sales report. 10-year gilts closed down 5bps at 4.09% while 10-year bunds were unchanged at 2.59%.
The US dollar was weaker against all G10 currencies on Friday with the dollar index (DXY) falling 0.5%. The improved risk tone amid falling global bond yields, and an increasing amount of Fed rate cuts being priced by the market for 2024, have weighed on the dollar. The DXY has retraced almost 3% from the late October highs. The Japanese yen outperformed amongst the majors with USD/JPY trading back below 150. The latest CFTC data revealed speculative accounts have increased Yen short positioning to the highest level since April 2022.
NZD/USD gained 0.5% against the dollar and closed on the session highs near 0.5990 having dipped towards 0.5940 in early European trade. NZD/AUD slipped below 0.9200.
NZ yields extended lower in the local session on Friday reflecting the directional moves in global markets. 10-year government bonds yields fell 11bps to 4.87% and were down 14bps at one point during the day. The was a further steepening at the long end of the curve with 10y/30y spread increasing to 22bps. This represents a sharp rebound off the recent lows near 8bps. The steepening move extended higher on Friday despite New Zealand Debt Management announcing reduced amount of supply into the ultras in the weekly tender on Thursday.
Australian bond futures are close to unchanged from the local close on Friday, suggesting limited directional bias for NZGBs on the open.