US equities ended last week on a positive note with the S&P advancing 1.2% to 4840, a new record high close. The move higher was underpinned by gains in technology companies. The index has now fully unwound the ~25% drawdown which began in January 2022 and reached a trough in October the same year. US treasury yields are mixed and the US dollar is little changed.
US consumer sentiment for January rose to its highest level since July 2021. The index rose to 78.8 from 69.7 in December which was well above consensus estimates. The cumulative 2-month climb is the largest since 1991. Improved sentiment reflects higher equity markets, lower gas prices and an increasing belief the Federal Reserve has finished raising interest rates. In addition, 5-to-10-year inflation expectations fell to 2.8% from which is near the bottom of the range from the past few years, but still above the pre-Covid level mean of 2.5%
There were several Fed speakers ahead of the blackout period for the January FOMC that pushed back against near-term rate cuts. Chicago Fed President Goolsbee, who is typically among the move dovish Fed members, said a further fall in inflation would open the door for rate cuts, though he stressed the FOMC will make decisions ‘meeting-by-meeting’. Atlanta Fed President Bostic said he wants to see more evidence of inflation falling and that policy makers should proceed cautiously toward interest rate cuts while San Fransico Fed President Daly said it’s premature to think rate cuts are around the corner.
US 2-year treasury yields increased 3bps to 4.41%. 10-year yields initially traded to fresh 2024 highs near 4.20% before reversing to end down 2bps at 4.12%. The market is looking ahead to the supply pipeline this week. There is US$162 billion of treasury issuance split across 2-,5-, and 7-year bonds alongside an expected US$25 billion of investment grade corporate issuance.
Yields on 10-year UK gilts fell initially after an unexpectedly sharp drop in retail sales in December before retracing to end unchanged at 3.93%. Core retail sales fell 3.3% m/m which was the largest fall on record after excluding the pandemic period. The data raises concerns about the outlook for economic growth and increases the probability of the economy being in a technical recession for H2-23.
Japan CPI ex-food and energy slowed to 3.7% y/y from 3.8%. This is the fourth consecutive month of declines and eases pressure on the Bank of Japan, which meets tomorrow, to adjust its ultra easy monetary policy. The yen is the worst performing G10 currency this year having fallen close to 5% against the US dollar which reflects higher treasury yields and the market pricing out any near-term tightening by the BoJ.
The US dollar ended Friday’s session little changed. Major pairings were confined to narrow ranges. The pound underperformed within the G10 following the dire retail sales report. NZD/USD retested the 2024 lows near 0.6090 in offshore trade but managed to make a modest recovery to close unchanged near 0.6115.
NZ government bond yields ended the local session on Friday higher in yield. 10-year bond increased 6bps to 4.72% with the yield curve steepening. 2-year bonds increased 3bps. The front end was supported by further evidence of weak economic activity. The manufacturing PMI slipped to 43.1 in December which is the lowest level of activity since October.
It is a largely clear economic calendar to start the week and the Wellington anniversary holiday will subdue local market activity.
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