US equities closed little changed at the end of last week. After a brief dip at the start of January, risk sensitive assets have remained well supported with the S&P closing on Friday just below its record reached back in January 2022 while investment grade credit spreads are trading at the tightest level in close to 2 years. Softer than expected US producer prices contributed to lower treasury yields on Friday night and currency markets were stable.
There was limited market reaction to news that US and its allies had launched airstrikes on Houthi targets in response to attacks on commercial ships in the Red Sea. Although the strikes will raise fears of a wider escalation in the region, the initial move higher in Brent crude prices towards US$81 per barrel subsequently retraced back inside the US$75-80 range that has persisted this year.
US producer prices decreased 0.1% in December compared with expectations for a 0.1% increase. This took the annual rate for headline and core prices to 1% and 1.8% respectively. The market priced additional easing by the Federal Reserve in response to the data. Fed funds futures imply a close to 80% chance of a 25bps rate cut in March and about 170bps of easing by the end of the year.
US treasury yields moved lower following the PPI data led by the front end. 2-year yields ended the session down 10bps at 4.14% which is the lowest level since May. 2-year treasuries peaked at 4.48% in the aftermath of the December labour market report earlier in the month and have since traded lower. 10-year treasuries were lower in yield – down 3bps to 3.94% - contributing to a steeper yield curve. Curve steepening has been a persistent theme in the new year with the US 2y/10y slope increasing 20bps to -18bps and retesting levels from October last year.
Consumer prices in China fell for the third consecutive month in December. CPI fell 0.3% on an annualised basis which was marginally above expectations for a drop of 0.4%. Producer prices fell 2.7% y/y which was the 15th month of falls. The economy has experienced deflationary pressures amid weak domestic demand.
Separately aggregate financing data in China revealed demand for credit from households and businesses remains weak. The pullback in the property sector has reduced demand for mortgages while subdued business confidence has impacted corporate borrowing. The Hang Seng China Enterprises Index is down nearly 5% in 2024 underperforming relative to global equity benchmarks. The Peoples Bank of China is expected to cut its medium-term lending rate by 10bps to 2.4% today.
The US Dollar dipped briefly following the PPI data but was broadly unchanged into the end of last week continuing the rangebound price action since the recovery from 5-month lows at the start of January. Lower front-end treasury yields didn’t have a lasting impact for the dollar although the yen outperformed within the G10 space.
NZD/USD spiked up towards 0.6280 in offshore trade Friday but retraced equally quickly. The kiwi has been rangebound in recent sessions since slipping from above 0.6300 at the start of 2024 aligned with recovery in the US dollar. The NZD has lost ground against the EUR and GBP in January and has gained against the JPY and AUD.
NZ government bond yields ended the local session on Friday lower in yield reflecting moves in global markets in the absence of domestic drivers. 10-year bond yields fell 9bps to 4.54% with a largely parallel move across the curve. NZ 10-year yields have moved higher, and the curve has steepened since the beginning of January, aligned with moves in global markets.
The economic calendar is quiet in the day ahead and the US holiday will impact market activity.
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