Weaker technology stocks contributed to a fall in US equities as the market looks ahead to the FOMC this morning (NZT). The Federal Reserve is expected to transition away from a tightening bias and prepare the way for easier policy in coming meetings. A plunge in the shares of New York Community Bank, which bought the failed Signature Bank last year, reignited concerns about US regional banks and impacted market sentiment. Global bond yields moved lower underpinned by softer than expected US data and signs of easing inflation in Europe.
The ADP measure of US private sector employment rose less than expected. According to ADP, jobs rose 107k compared with consensus estimates of 150k though this has not been a reliable indicator for official payrolls data. Separately the employment cost index, which is closely watched by the Fed, increased 0.9% q/q which was below consensus estimates. It is the smallest increase since Q2-21 and suggests that wage pressures are easing despite the low unemployment rate and solid payrolls gains.
There were further signs of cooling inflation pressures in Europe with both German and French CPI printing below expectations ahead of data for the Eurozone this evening. German CPI rose 3.1% y/y in January, down from 3.8% in December, and was below consensus estimates of 3.2%. The market firmed expectations for ECB rate cuts. A 25bps rate cut is fully priced for the April meeting which supported a rally across European bonds.
US treasuries moved lower in yield led by the front end as the softer than expected data and soft risk sentiment saw investors raise the chance of a rate cut by the Fed at the March FOMC. 2-year yields fell 11bps to 4.23% while 10-year yields slipped below 4.0%. The Treasury’s quarterly refunding announcement, which details the size of bond supply, was in line with expectations. The Treasury also indicated there will be no further increase in issuance volumes in coming quarters.
The prospect of easier monetary policy weighed on the US Dollar. The dollar index has fallen close to 0.5% since the local close yesterday. The yen outperformed amongst the majors and reached a 2-week high against the dollar given its sensitivity to the move in US treasury yields and defensive properties amid renewed concerns about US regional banks. EUR/USD slipped initially following the soft inflation prints but recovered in line with broader dollar weakness.
NZD/USD rebounded sharply off the lows near 0.6110 reached in early European trade. The softer than expected US data contributed to a move above 0.6170 before retracing. NZD/AUD has maintained levels above 0.9300 in offshore trade after advancing yesterday following the softer than expected Q4 CPI data in Australia.
NZ government bond yields ended the local session yesterday lower in yield amid month end demand. 10-year bond yields fell 7bps to 4.60% with smaller moves in the front end contributing to a further yield curve flattening. Australian bond futures are ~8bp lower in yield since the local close yesterday, and combined with the move in US treasuries, suggest a downward bias for NZGB yields on the open.
New Zealand Debt Management is tendering bonds today. NZ$500 million of nominal NZGBs are offered split across 15 May 2030 ($250m), 14 Apr 2033 ($175m) and 15 May 2051 ($75m). In addition, NZ$30 million of the Sep 2035 inflation indexed bonds (IIB) will be offered.
The initial focus this morning will be the FOMC and Chair Powell’s press conference. As previously mentioned, CPI data is released in the Eurozone this evening and the Bank of England is expected to leave rates unchanged at 5.25%. In the US, the January ISM manufacturing index is expected to point towards subdued activity with little change from December.
[chart;daily exchange rates]
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