US manufacturing ISM weaker than expected. New orders, production and employment all contracted suggesting the manufacturing sector is struggling to gain momentum. Preliminary Eurozone CPI data for February continued to fall

Positive risk sentiment propelled global equity indices to fresh record closes at the end of last week. The S&P traded above 5,100 and the Eurostoxx 50, looked past stronger than expected inflation data, to eke out a new all-time high. Treasury yields and the US dollar fell following weak manufacturing data and WTI crude prices rose above US$80 per barrel.

The US ISM manufacturing index fell to 47.8 from 49.1 in January which was below economists’ expectations for an increase to 49.5. New orders, production and employment all contracted suggesting the manufacturing sector is struggling to gain momentum. The final reading of the University of Michigan’s consumer sentiment index registered an unexpected fall. The index dipped to 76.9 from 79.6 in January. Long-run inflation expectations remained stable at 2.9% for the third straight month.

Eurozone preliminary CPI increased 2.6% y/y, which was marginally above the 2.5% consensus estimate, but down from 2.8% in January. Core inflation fell to 3.1%, a seventh successive monthly fall. The upside surprise supports policy-makers caution on near-term easing. The ECB is unanimously expected to leave rates unchanged this week. A 25bps rate cut is almost fully priced by June and market pricing implies close to 100bps of easing through 2024.

China’s official manufacturing PMI was little changed from January levels at 49.1 and suggests manufacturing contracted for the fifth consecutive month. The non-manufacturing PMI increased to 51.4, beating expectations, and was supported by a pickup in activity during the Lunar New Year holiday. The National People’s Congress begins on Tuesday, where Chinese leaders will announce policy priorities, alongside targets for economic growth and fiscal stimulus.

US treasury yields drifted higher initially before reversing course after the weak ISM manufacturing print. 2-year yields dropped more than 10bps from the session highs and ended 9bps lower on the day at 4.53%. The ~4.50% level is where yields broke higher in early Feb and forms near term support in yield terms. 10-year treasuries ended 7bps lower at 4.18% with the ultras lagging the move. The latest CFTC futures positioning data revealed further large buying of futures across the curve by speculative accounts.

Fed governor Waller said he would like the Federal Reserve to boost its share of short-term Treasuries. He noted that prior to the financial crisis, the Fed’s treasury holdings included more than 30% in T-Bills, but this has fallen to less than 5%. He also reiterated the Fed’s balance sheet is a separate policy issue from adjustments in the fed funds rate echoing previous comments from Fed Chair Powell.

The US dollar followed treasury yields lower after the data. However, the move was relatively modest – a 0.2% fall in the dollar index (DXY) – and was contained by recent ranges. Scandinavian currencies outperformed within the G10. The AUD and NZD largely matched the move in the DXY without independent catalysts. NZD/USD bounced off the 0.6080 level, which corresponds with the post-RBNZ lows, and closed back above 0.6100.

NZGB yields were little changed on in the local session on Friday. 10-year yields increased 1bp to 4.76% while shorter maturity bonds ended unchanged. There were larger moves at the front end of the swap curve with 2-year yields up 5bps. Australian 3-year bond futures are 3bps lower in yield since the local close on Friday while 10-year futures are 1bp lower suggesting a modest downward bias to NZ yields on the open.

It is a quiet start to the week from a data perspective with no domestic or international first-tier releases. In the week ahead there is the US labour market data, services ISM and the ECB policy decision. In addition, Fed chair Powell is testifying before the House Financial Services Committee.

[chart;daily exchange rates]