Soft tone continues for risk sensitive assets. US consumer sentiment downbeat and is tracking towards multi-year lows. Canadian labour market surprises positively

The S&P declined by close to 1.5% on Friday, before staging a recovery, after Senate Democrats scaled back their demands to end the government shutdown. Investor sentiment had been impacted by signs of weakness in the US labour market and falling consumer confidence. Technology stocks remain in focus amid concerns about high valuations. Major equity indices in Europe and Asia closed lower. Global bond markets were mixed while the US dollar was broadly weaker against G10 currencies.

University of Michigan consumer sentiment was weaker than expected. The index dropped to 50.3 and is only marginally above the multi-year low reached in mid-2022. Weak consumer sentiment likely reflects concerns about the economic effects of the government shutdown and signs of weakness in the labour market. The expectations component, which typically has a better relationship with spending, edged lower. Five-to-10-year inflation expectations declined to 3.6% although the FOMC is less sensitive to this measure.

The absence of US key economic data resulting from the longest-ever federal government shutdown is creating uncertainty for investors and policy makers. The release of the US labour market report for October, which was scheduled for Friday, has been impacted for the second consecutive month. Most of the alternative and private data sources have suggested a slowdown in the labour market. Market pricing for the December FOMC was steady and indicates about a 65% chance of a 25bp rate cut at the meeting.

Treasury markets were little changed on Friday. A dip in yields after the weak consumer sentiment data retraced. 10-year yields ended the week at 4.10%. The treasury market looks ahead to US$125 billion of refunding coupon supply this week. European government bonds closed modestly higher in yield. Canadian government bonds underperformed after stronger than expected labour market data.

Payrolls in Canada increased by 66k in October, well above the consensus estimate for a 5k fall. The increase was driven by part-time employment. The unemployment rate dropped to 6.9% from 7.1%. This was the second consecutive upside surprise for payrolls and suggests the labour market may be more robust than many had thought. The market reduced the already slim chance for a December rate cut by the Bank of Canada. Governor Macklem said last month that policy rates were 'about right' despite the central bank’s projections that the economy would remain weak through 2027.

The US dollar index moved lower through most of the offshore session before making a partial recovery. Absolute moves for the major pairings were not large. The Canadian dollar outperformed within G10 currencies with the labour market data providing support. NZD/USD was little changed and oscillated in a narrow range around 0.5620. The NZD was stable on most of the main crosses though NZD/JPY traded modestly higher relative to the local close.

China’s exports were weaker than expected in October. The period corresponded with renewed tensions with the US. Exports fell 1.1% y/y while imports also slowed sharply resulting in a US$90 billion surplus. Exports have been broadly resilient this year despite the trade war with the US. The recent thaw in relations suggests trade could see a pickup in coming months.

There was a decent rally across NZ fixed income in the local session on Friday, reflecting moves in offshore markets, in the absence of domestic drivers. The long end outperformed with 10-year rates declining 4bp to 3.64%, largely reversing the move from the previous session. Pricing for the terminal Official Cash Rate is back on the cycle lows near 2.07%. The government curve largely matched the decline in swap yields with the benchmark 10-year bond ending last week at 4.08%.

Jason Wong is the Senior Markets Strategist at BNZ Markets.