US core CPI undershoots expectations for the second consecutive month. Oil prices gain 3% and approach two-month highs. US dollar recovers from the decline earlier in the week

Global asset markets are broadly stable overnight. US core CPI undershot expectations but had limited lasting impact on US rates. Investor concerns about the investigation into Federal Reserve Chair Powell appeared to abate. Central bank governors from 11 institutions, issued a statement of support for Powell and the Fed's independence, which contributed to a reversal of the US dollar’s decline from the previous session. The S&P lurched to a fresh intraday record high after the CPI data but has since retraced. The potential for a snap election in Japan saw the Nikkei gain 3% and reach a record high while the yen and government bonds were under pressure.

Oil prices gained 3% and climbed to a two-month high after President Trump encouraged Iranians to keep protesting and said ‘help is on its way’ suggesting scope for potential US intervention. The President said a 25% tariff would be imposed on countries doing business with Iran. Brent crude prices increased toward US$66 per barrel. Gold was steady after recent gains while silver extended its recent rally with prices approaching US$90 an ounce.

US core CPI surprised to the downside for the second consecutive month. Core prices increased 0.2% in December, which was below the 0.3% consensus estimate and saw the annual rate remain steady at 2.6%. The softer than expected reading in November had been distorted by the US government shutdown. The December data will increase confidence about slowing price growth. The release of PPI data this evening will enable fine tuning of estimates for the core PCE deflator, the Fed’s preferred measure of inflation.

US treasury yields fell in the immediately following the CPI release. 2-year yields declined 5bp to 3.49% but rebounded equally quickly and are little changed. Price action further out the curve was muted with 10-year yields stable near 4.18% and remain contained by the narrow 2026 trading range. Treasury supply remained in focus with the US$22 billion 30-year auction.

After a public holiday on Monday, Japanese government bonds opened under pressure. 30-year yields spiked 12bp initially, and reached a multi-decade high above 3.50%, before retracing. JGBs are under pressure on fiscal concerns as speculation grows that Prime Minister Sanae Takaichi might dissolve the parliament and call an election as soon as next month.

In currency markets, the US dollar broadly reversed the decline from the previous session. USD/JPY traded above 159 to the highest level since July-2024 despite comments from the Finance Minister cautioning against one-sided moves. NZD/USD fell towards 0.5740 overnight. The NZD is weaker on the key crosses since the local close yesterday except for NZD/AUD where changes were modest.

The Quarterly Survey of Business Opinion (QSBO) suggests the NZ economic recovery is gaining momentum. Activity indicators improved while measures of investment and employment also showed signs of strength. Notably, a net 25% of businesses intend to raise selling prices. There was also evidence of a tightening in the labour market. In aggregate, the report likely extinguishes the RBNZ’s mild easing bias at the November Monetary Policy Statement.

NZ swap rates moved higher following the QSBO in the local session yesterday led by the front end of the curve. 2-year rates were 5bp higher intraday but ultimately closed up 3bp at 2.93%. The curve flattened initially but the 10-year rates eventually matched the yield adjustment in the front end and closed at 4.08%. The government curve moved in line with swaps with a 3bp parallel shift higher.

NZ filled jobs data for November is released today. Job growth was flat in October, and this series tends to be revised lower, which could be a risk to our forecast 0.3% growth in employment for Q4. Building permits for November are also scheduled. China’s December trade data is expected to show slower growth in both imports and exports. PPI and retail sales data for November are released in the US.

Stuart Ritson is a Markets Strategist at BNZ Markets.