US consumer confidence improves for the first time in five months. But limited moves across risk sensitive assets. Large moves in the Canadian dollar and rates after labour market stronger than expected

Net moves across risk sensitive assets were modest into the weekly close. The S&P traded up towards the late October record high above 6900 before paring its gains to end the session only marginally in positive territory. There was limited market reaction to the delayed release of the September PCE report. Global sovereign bond yields closed higher in yield, and the US dollar was stable against G10 currencies, except for the Canadian dollar, which gained after strong labour market data.

University of Michigan consumer confidence improved for the first time in five months and came in ahead of consensus estimates. The survey included responses following the end of the federal government shutdown. The expectations index, which is a better guide to growth in consumers’ spending, was also firmer. Despite an improvement in expectations, the level is consistent with subdued spending growth in Q4. Five- to ten-year inflation expectations fell to 3.2% from 3.4% in November.

After the delayed release of the Federal Reserve’s preferred PCE inflation gauge for September, policy makers are likely to revise down their near-term inflation forecast at the FOMC this week, which will help to support the case for a rate cut. The core PCE deflator increased by 0.20% which matched the consensus estimate. The annual rate dropped to 2.8%, from 2.9% in August.

Market pricing for the upcoming FOMC was little changed in response to the data and a 25bp cut to the Fed Funds Rate is all but fully discounted. US treasury yields moved steadily higher through the session. Yields increased 4bp uniformly across the curve relative to the NZ close. 10-year notes ended the week at 4.14%.

Canadian government bonds sold off sharply, and the CAD gained after stronger-than-expected November employment data. Payrolls increased 54k, easily beating the consensus estimate, while the unemployment rate dropped to 6.5% from 6.9%. The largest moves were in the intermediate sector of the curve and 10-year yields increased by 15bp to 3.40%.

Outside of the CAD, G10 currency markets had small net moves against the US dollar. The yen pared earlier gains after a Bloomberg article said the Bank of Japan is likely to raise rates at its upcoming meeting citing people familiar with the matter. According to the article, the central bank is expected to continue to raise rates if the economic outlook is realised. There is a ~90% chance of a 25bp hike priced. USD/JPY dipped to 154.40 before recovering. NZD/USD was little changed, and the NZD was stable on the key crosses.

There was continued focus on the People's Bank of China’s (PBOC) daily CNY fix on Friday, amid recent signs of discomfort from the central bank, after USD/CNY declined sharply since the beginning of the month. The PBOC has been setting the daily fix at levels weaker than market estimates, signalling its preference for stability. The PBOC’s fix was in line with expectations on Friday but further pushback is expected if USD/CNY declines too quickly.

The large swings in NZ fixed income continued in the local session on Friday. The swap curve bear steepened. 2-year yields increased 2bp to 2.89%, and are back at the post-RBNZ yield highs, having dipped to 2.80% intra-week. 10-year yields closed 5bp higher at 4.00%. The market was flow driven in the absence of local data and underperformed against Australia.

The government curve matched the move in swaps and 10-year NZGB yields closed the week at 4.35%. Australian 10-year government bond futures are ~2bp higher in yield terms since the local close on Friday suggesting a modest upwards bias for NZ rates on the open.

It’s a quiet start to the week for economic data. There are no domestic releases of note and only second-tier international data.

Stuart Ritson is a Markets Strategist at BNZ Markets.