US equity markets consolidated. Asian indices hit record levels. Global bond yields rebound. US Treasury 10-year up 4bp with a steeper curve. Fitch downgrades French rating amid rising debt and political instability

The S&P ended flat on Friday with the index consolidating near all-time highs after a solid week of gains. European markets were also little changed while stocks in Japan, South Korea and Taiwan closed at record levels. Weaker than expected US consumer confidence data did little to alter expectations for the FOMC this week. Government bonds are higher in yield with the largest moves seen in European markets. Currency markets were quiet. Oil prices were steady as US threats to sanction Russian crude didn’t materialise. Gold remained near a record high with prices holding close to $3,650 a troy ounce.

US consumer sentiment hit the lowest since May and long-term inflation expectations rose for the second straight month. University of Michigan sentiment declined to 55.4, which was below the median estimate, reflecting consumer anxiety about employment prospects and personal finances. The expectations index, which has a decent relationship with real consumption, fell to a four-month low, suggesting subdued real spending growth in Q3. 5-to 10-year inflation expectations increased to 3.9% from 3.5% the previous month.

The rally in US treasuries took a break with yields moving higher and steeper. Moves in the front end of the curve were modest – 2-year yields increased 1bp to 3.56%. 10-year notes traded 4bp higher to 4.06%, having briefly dipped below 4.0%, in the previous session. Fundamental drivers were limited given the quiet data calendar and with Federal Reserve officials in the blackout period ahead of the FOMC.

European bond markets underperformed. 10-year bund yields increased 6bp with curve steepening bias. The spread between French 10-year OATs and bunds was stable ahead of Fitch’s update on France after the close of trading. Fitch downgraded France to A+ from AA-, citing rising public debt and political instability. The ratings agency forecast the fiscal deficit to remain above 5% of GDP and expects the upcoming budget negotiations will result in less fiscal consolidation than proposed in the previous package.

Currency markets were subdued. An initial move higher for the US dollar faded and the dollar index ended unchanged from the NZ close. Absolute moves across G10 currencies were small but the NZD was marginally weaker against the pound and euro. There was little reaction in USD/JPY to a joint statement from the Japanese Ministry of Finance and US Treasury that exchange rates should be ‘market determined’.

High frequency NZ activity data was mixed. The manufacturing PMI dipped to 49.9 in August. This was down 2.9 points from 52.8 in July and below the 52.5 long term average. The report suggests the manufacturing sector is struggling to gain traction after an extended period of contraction through 2023 and 2024. Separately, electronic card transactions increased in August, for the second consecutive month, and suggests some improvement albeit from a low, sub-trend base.

It was a quiet end to last week for the NZ fixed income market. The swap curve closed 0-2bp lower and flatter reflecting offshore moves. There were similar moves for the NZ government curve with 10-year bond yields ending the session 2bp lower at 4.28% which is the lowest level in twelve months. Australian 10-year government bond futures are unchanged, compared with levels at the local close on Friday, suggesting limited directional bias for NZ yields on the open.

The domestic focus today will centre on the services PMI which improved to 48.9 in July. Monthly activity data is released in China. Key domestic releases in the remainder of the week ahead include Q2 GDP and partial inflation indicators for August. Labour market data is scheduled in Australia. It is a busy week for global central banks with the Federal Reserve, Bank of Japan and Bank of England meeting. The Fed is expected to reduce rates by 25bp while the BoJ and BOE leave policy unchanged.