Concerns about high valuations for companies linked to AI weigh on US equities. FOMC dissenters outline rationale for leaving rates unchanged last week. US treasury curve steeper. Currency markets subdued

Concerns about the outlook for artificial intelligence and technology stocks weighed on investor risk sentiment into the weekly close. A disappointing sales outlook from Broadcom fuelled investor concerns about high valuations for companies linked to the sector. The S&P fell 1% and the Nasdaq declined 1.7% while European indices also closed lower. Global government bond market yields increased and the US dollar was broadly stable against G10 currencies.

There was limited economic data to provide the market with direction. Kansas Fed President Schmid said he dissented in favour of no change to interest rates at the FOMC last week because inflation remains too high and the economy continues to show momentum. He said he prefers to keep policy modestly restrictive amid lingering inflation pressures. Chicago Fed President Goolsbee, the second dissenter to leave rates steady, said he wanted to wait for more data to be certain the impact of tariffs on inflation is transitory.

Market pricing for the Fed was little changed. There is slightly more than two 25bp cuts priced by the end of next year. US treasuries were mixed. Yields on front end bonds declined modestly while intermediate and longer end increased. 30-year treasuries reached 4.85% which is the highest level since September. 10-year notes increased 3bp to 4.18% and the 2y/10y curve extended the recent trend and steepened to +66bp, a cycle high.

The UK economy contracted 0.1% in October which was below the consensus estimate for a 0.1% gain. Monthly GDP data is often revised. But assuming there are no changes, the GDP data suggests the economy could contract in Q4. This compares with the Bank of England’s projection for +0.3% for the quarter. Key labour market and CPI data is released this week ahead of the policy decision. The BOE is expected to cut rates by 25bp to 3.75% which is close to fully discounted by market pricing.

There was subdued price action across currency markets. The US dollar consolidated after the decline following the FOMC. The US dollar index retraced from an initial gain on Friday night and ended unchanged relative to the NZ close. The pound lost ground following the weaker-than-expected GDP data and closed lower against the euro. NZD/USD dipped below 0.5800 before recovering and the NZD was stable on the major cross rates.

NZ yields edged higher in the local session on Friday. There was limited market reaction to the marginal improvement in the manufacturing PMI and firm electronic card transactions data for November. In addition, there was limited movement in offshore markets. 2-year swap rates were unchanged at 3.08% with the market appearing more balanced as fresh macro account interest emerged to fade the recent selloff. 10-year NZGBs closed 3bp higher at 4.52%.

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.

NZ services PMI is the only domestic economic data of note today. In Japan the Tankan survey will provide an update on economic activity ahead of a likely 25bp rate hike by the Bank of Japan later in the week. Monthly activity data including retail sales, industrial production and fixed asset investment is scheduled in China. CPI data for November is released in Canada.

Stuart Ritson is a Markets Strategist at BNZ Markets.