Soft US CPI data contributed to a solid rally for equity markets and lower treasury yields. ECB held rates steady and upgraded growth and inflation forecasts. BofE made a cautious cut

Softer than expected US CPI data reinforced expectations for further rate cuts by the Federal Reserve and contributed to solid rally for equity markets. The S&P is more than 1% higher in afternoon trading with larger gains for the Nasdaq. Global government bond yields are broadly lower while the US dollar is little changed against the major FX pairings.

US CPI data for November undershot expectations but needs to be treated with some caution, as collection only resumed mid-month, after the government shutdown had ended. Headline CPI increased at a 2.7% annual rate, down from 3.0% in September, and well below the 3.1% consensus estimate. Core inflation fell to 2.6%, also well below the 3.0% consensus estimate. Data wasn’t collected in October meaning monthly rates were not available. Despite the potential distortions in the data, US treasury yields have settled 2-4bp lower across the curve with a curve flattening bias. 10-year notes are 4bp lower at 4.12%.

The Bank of England cut rates by 25bp to 3.75% as expected though the vote split was closer than anticipated with a 5-4 majority. The cut follows data this week that pointed towards a slowing economy and the unemployment rate climbing to a four-year high. Governor Bailey said there is scope for some additional policy easing next year but that Monetary Policy Committee’s decisions will be finely balanced. The cautious messaging contributed to modestly higher front end gilt yields and a firmer pound.

The European Central Bank left its policy rate unchanged at 2% for the fourth consecutive meeting which was in line with economists’ expectations. The central bank upgraded its 2026 growth forecasts to 1.2% (1.0%) and inflation to 1.9% (1.7%). Officials expect the easing cycle is likely to be finished based on the latest outlook for growth and inflation. President Lagarde noted the Bank will take a meeting-by-meeting approach dependent on the incoming data. Market pricing implies the ECB will leave rates on hold for some time.

Net moves across most G10 currencies have been modest. The US dollar index traded higher initially but retraced after the CPI data. The pound outperformed against the euro after the cautious tone from the BOE about further easing. The AUD and NZD have benefited from the improved risk tone and have outperformed since the local close yesterday. NZD/USD traded up towards 0.5785 overnight and is firmer on most key crosses and stable against the AUD.

The NZ economy expanded by 1.1% in the September quarter which was above the 0.9% consensus estimate. A rebound was expected after the unexpectedly large contraction in Q2. The 1.3% annual growth rate matched expectations and was positive for the first time since mid-2024. The data was broadly in line with expectations and had limited impact on NZ rates and the NZD.

NZ swap rates moved modestly lower in the local session yesterday, led by the front end, in line reflecting moves in offshore markets. 2-year swap rates declined 4bp to 2.98%, supported by a drop in mortgage related pay side flow, while 10-year rates closed 1bp lower at 4.16%. The 2y/10y curve steepened to +118bp and is back at the cycle peak. The government curve largely matched the move in swaps with 10-year bonds ending the session at 4.44%.

Domestic consumer and business confidence data are scheduled for today. Consumer confidence has recovered but remains at subdued levels from a historical standpoint. Business confidence remains elevated, and firms’ activity expectations increased to a multi-year high in October. CPI is released in Japan ahead of the Bank of Japan’s policy decision. The Bank is expected to increase rates by 25bp to 0.75%. There are no new forecasts, and the focus will centre on Governor Ueda’s press conference regarding the pace of future hikes and the terminal rate.

This will be our last Markets Today for 2025. We would like to wish our readers a happy and safe festive season and look forward to connecting with you again in the New Year. Our first 2026 publication will be on 13 January.

Stuart Ritson is a senior Markets Strategist at BNZ Markets.