US equities were little changed on Friday amid comments from Fed officials that pushed back against the idea rates could be lowered soon. This contributed to higher front-end treasury yields and a stronger US dollar, mainly against European currencies. Despite ending flat on Friday, the S&P was up 2.4% on the week and is only 2% below the record high from January 2022.
Comments from New York Fed President, John Williams, appeared to push back against speculation of near-term rate cuts by the Federal Reserve. He said, ‘We aren’t really talking about rate cuts right now’ and suggested the Fed is still focused on whether rates are sufficiently restrictive to get inflation back to its 2% target. In addition, Atlanta Fed President, Raphael Bostic said he sees two 25bps rate cuts in the latter half of 2024. The market is pricing close to 20bps of rate cuts at the March FOMC and about 140bps of easing through 2024.
November industrial production in the US rose 0.2% m/m, close to the consensus estimate of 0.3%. Manufacturing received a boost from auto production following the return of striking workers. The advance reading of the US PMIs for December showed manufacturing slipping to 48.2 from 49.5 in November, while services improved to 51.3 from 50.8.
Advance PMIs in Europe were weaker than expected. The manufacturing and services indexes remain at contractionary levels. The composite index fell to a two-month low of 47, down from 47.6 a month earlier. European bonds rallied in response to the data with investors choosing to look past comments by policy makers the previous day that the ECB was not discussing rate cuts. 10-year bund yields dropped 11bps to 2.02%, the lowest level since January.
The PBOC kept its 1-year MLF rate unchanged at 2.5% which was in line with the consensus estimate though some economists had forecast a 10bps cut. The bank injected a record 800 billion yuan, which is the largest quantity since records began in 2014, aimed at boosting the economy. China’s monthly activity data were mixed in November. Industrial production rose 6.6% y/y, beating consensus expectations. However, retail sales came in lower than anticipated, rising 10.1% y/y, the annual figure exaggerated by the COVID lockdown a year ago.
US treasury yields moved higher following the comments from NY Fed’s Williams. 2-year yields had been drifting lower and jumped 10bps before ending the session up 6bps at 4.42%. A similar spike in in 10-year yields retraced quickly to end little changed at 3.91% only just above the weekly yield lows. Powell’s comments last week carry more weight than other Fed speakers.
In currency markets, the euro came under pressure initially from the weak PMIs and then fell further following the move higher in US front end yields. From above 1.10, EUR/USD dropped close to 1% to end the week near 1.09. The NZD ended little changed. NZD/USD dipped towards 0.6180 following Williams’ comments but recovered above 0.6200 into the weekly close.
After a volatile week, it was a quiet session for domestic interest rates on Friday. 10-year government bond yields ended unchanged at 4.57%, having fallen 31bps over the week to the lowest levels since July. Interest rate swap markets were similarly quiet edging a few bps higher.
On the calendar today, NZ consumer confidence and the performance of services index are released, with German IFO data tonight. Later in the week, there will be some interest in the government’s “mini-Budget”.
Globally, the key release this week will be the BoJ policy meeting tomorrow, where the Bank is expected to leave policy unchanged, but there is increasing pressure on the Bank to adjust policy. Key global economic releases include UK, Japan and Canadian CPI data and the US core PCE deflator at the end of the week.
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