S&P500 closes higher breaking a three day losing streak. US real spending beats expectations continuing the run of firm data. Core PCE deflator in line with consensus estimate

After declining for three consecutive session, US equities rebounded into the end of last week with data pointing to resilience in the US economy. The market looked past President Trump’s announcement of fresh industry-focused tariffs, including a 100% duty on patented pharmaceuticals. The S&P closed 0.6% higher. Major European indices made solid gains with the Euro Stoxx index advancing 1%. Sovereign bond markets were little changed, and the US dollar was modestly weaker.

US real personal spending was stronger than expected in August, increasing 0.4% on the month, compared with the 0.2% consensus estimate. Previous months were also revised higher. The consecutive gains in personal spending add to evidence of solid activity in the current quarter though the medium-term outlook will be tied to the labour market’s resilience. The core PCE deflator increased 0.2%, matching expectations which kept the annual rate stable at 2.9%.

There was negligible impact on US rates from the data. Market pricing implies 22bp of easing for the October FOMC and a cumulative 41bp by the end of the year. Richmond Fed President Barkin said that while unemployment and inflation have both moved away from the goals, he sees only limited risk of further deterioration. Separately, Fed Governor Bowman said she prefers a gradual approach to rate changes and that the neutral interest rate is near 3.0%.

Price action in US treasuries was subdued. Front end yields were little changed while 10-year notes increased 1bp to 4.18%. 10-year Treasury yields are near the highest level since the beginning of September as the market looks ahead to a busy week of US economic data.

The US dollar declined modestly against G10 currencies. The pound and Scandinavian currencies made the largest gains although there was no obvious catalyst. NZD/USD oscillated in a narrow trading range and is little changed from the local close on Friday. NZD/GBP reached a fresh multi-month low and is approaching 0.4300 where the cross found a base amid the market volatility in April. Although the decline was small, NZD/EUR fell to the lowest level since 2009.

Tokyo CPI, which closely monitored as a leading indicator for nationwide price trends, was significantly softer than expected. The core measure which excludes both fresh food and energy increased at a 2.5% annual rate compared to the 2.9% consensus estimate. The undershoot was driven by one-off factors and is unlikely to materially impact the outlook for Bank of Japan policy. The market is pricing around a 50% chance for a 25bp hike in October.

NZ swap rates edged higher in the local session on Friday with little reaction to the data. Although consumer confidence increased marginally in September, it remains subdued overall and suggests some downside risk to our forecast pickup in household spending. Rates closed 1-2bp higher across the curve and are largely unchanged from the start of the week, despite higher global yields, resulting in a significant cross market outperformance. Terminal OCR pricing was stable near 2.30%.

There was limited movement for NZ government bonds. 10-year yields increased by 1bp and closed at 4.23%. Australian 10-year government bond futures are ~2bp lower in yield terms, compared with levels at the local close on Friday, suggesting limited directional bias for NZ yields on the open.

Filled jobs for August is the only domestic release of note today. ANZ business confidence and building consents are scheduled for Tuesday and Wednesday respectively. US labour market data is the main international release in the week ahead, and a potential US government shutdown at the end of the month, also looms as a potential risk event. The RBA is expected to leave rates on hold on Tuesday. Preliminary CPI data is scheduled for the euro area and PMIs are released in China ahead of the Golden Week Holiday.

Stuart Ritson is the Senior Interest Rate Strategist at BNZ Markets.