US equities end October positively on robust corporate earnings. One Fed governor said he voted against cutting rates on inflation concerns. US dollar at fresh three month highs

US equities ended the month on a positive note. Earnings season remains in focus for investors. The vast majority of the 60% of S&P firms that have reported results so far have exceeded analyst estimates according to Bloomberg. The S&P closed 0.3% higher extending gains for October to 2.3%. Other global equity indices were mixed. The Nikkei surged 2% to a fresh record while European stocks closed lower. Price action in global bond markets was subdued, and the US dollar extended its recent move higher.

There are growing signs of tightening liquidity across global money markets. Key secured money market rates have risen in the US and UK. While the granular reasons differ, it broadly reflects the impact of central banks unwinding of covid-era policies and an increase in government debt issuance. The US Federal Reserve will end quantitative tightening on 1 December, and the Bank of England has encouraged use of its liquidity facilities. In NZ, the RBNZ injected liquidity on Friday and open market operations are expected to become more frequent as the level of settlement cash decreases towards ample.

Kansas Federal Reserve President Schmid said he voted against the decision to reduce rates by 25bp last week due to concerns about inflation. He said the economy is showing continued momentum, the labour market is in balance and that inflation remains too high. Two regional Federal Reserve presidents (both non-voters) have also said they did not support the interest rate cut, highlighting the divergent views which led to Chair Powell saying another move in December was not a foregone conclusion.

Headline CPI in the euro area decelerated to 2.1% y/y in October which was in line with the consensus estimate. The core reading was unchanged relative to the previous month at 2.4% and services inflation accelerated to 3.4%. Elevated services inflation, which mostly reflect domestic cost pressures, is expected to moderate but supports the on-hold stance of the European Central Bank.

European fixed income markets were broadly unchanged. 10-year bunds closed 1bp lower at 2.63%. US treasuries rallied with yields closing 2-3bp lower across the curve. 10-year notes closed at 4.09%, having reached 4.11% during last week after the FOMC.

The US dollar continued to trade higher with the dollar index reaching the highest level since August. The dollar’s advance was most pronounced against continental European currencies. The NZD and AUD were little changed relative to the local close on Friday.

Tokyo CPI, which serves as a leading indicator for nationwide prices, increased more than expected in October. The core measure which excludes fresh food and energy increased 2.8%. This was above the consensus estimate and supports the case for a December rate hike. There is around a 50% chance of a 25bp hike priced for the next meeting, which was little changed after the data, although the yen received some albeit temporary support.

The official manufacturing PMI in China dipped to 49.0 in October remaining below 50 and in contractionary territory for the seventh straight month. The data may be impacted distorted by the timing of holidays. The non-manufacturing index moved trivially higher to 50.1. Soft PMI readings in part reflects subdued domestic demand.

There was a further move lower for NZ swap rates in the local session on Friday. Although not impactful for market pricing, weak consumer confidence data reinforced the subdued state of the NZ economy. Swap rates declined 1-2bp across the curve. Government bonds outperformed. 10-year NZGB closed 4bp lower at 4.05% and matched maturity swap spreads tightened further to +44bp.

Building permits for September is the only domestic release of note today. RatingDog (previously Caixin) manufacturing PMI is scheduled in China. In the US, the ISM manufacturing will be closely monitored.

Jason Wong is the Senior Markets Strategist at BNZ Markets.