US equity markets rebound. A decline in US jobless claims underpinned the US dollar against European currencies. Oil prices sharply lower after an apparent easing in US-Iran tensions

US equities have rebounded from the weakness in the previous session. The S&P is up around 0.7% currently and there were decent gains for key European indices. Treasury yields increased after resilient labour market data and the US dollar gained against European currencies. Oil prices declined sharply, and precious metals also slipped from their record highs. Silver prices were volatile and declined close to 7% intraday before recovering.

Oil prices fell sharply after an apparent easing in US-Iran tensions. President Trump said he had been assured that authorities in Iran would stop killing protesters, suggesting a decreased probability of a threatened military response, to the repression of demonstrations. Having traded up towards US$67 per barrel the previous session, Brent crude prices declined more than 4% to $63.50.

There was a surprise drop in US initial jobless claims suggesting the labour market may be stronger than expected. Claims fell to 198K in the week ending January 10, which below the consensus of 215K and all the estimates in the Bloomberg survey. The four-week moving average declined to 205k, the lowest level in two years. Separately, the Empire and Philadelphia manufacturing surveys provided a more positive assessment of activity than expected.

US treasury yields moved higher in response to the jobless claims data, led by the front end of the curve. 2-year treasury yields are 5bp higher at 3.56%. Moves further out the curve were muted with 10-year yields marginally higher at 4.16% in a continuation of the rangebound price action. The 2y/10y treasury curve has retraced to +60bp from +72 in early January.

UK GDP significantly surprised to the upside in November. The economy grew 0.3% which exceeded economist expectations for a modest 0.1% expansion. Industrial production increased 1.1% as the car industry continued to recover from the cyberattack which impacted Jaguar Land Rover. The market trimmed Bank of England easing expectations and gilt yields increased across the curve.

European currencies are weaker against the US dollar with the pound matching the decline in the euro despite the GDP surprise. Given the relatively large weight of European currencies in the dollar index basket, this indicator made a fresh high for the year after the jobless claims data. Outside of the European currencies, the yen and NZD were little changed against the US dollar and the AUD advanced. NZD/EUR is back towards the 2026 highs near 0.4950. NZD/AUD extended below 0.8570 in offshore trade.

There was a strong rally across NZ fixed income in the local session yesterday driven by the longer end of the curve. The positive tone from offshore markets provided the initial impetus for lower yields and the move gathered momentum through the session. A solid government bond tender also supported sentiment. 2-year swap rates closed 3bp lower at 2.91% and 10-year swap rates declined 8bp to 4.03%. The 2y/10y curve retraced to +112bp, the lowest level in four weeks, and 9bp below the recent high.

The government bond curve closed lower and flatter. 10-year bonds ended the session 8bp lower at 4.40%, matching the move in swaps. Investor demand was solid in the first tender for this year. There was NZ$2.2 billion of bids for the NZ$450 million of bond offered and both lines cleared below the prevailing market levels.

Selected prices indices for December are released today and will help firm up our Q4 CPI forecast. The quarterly data is released at the end of next week and we look for a 0.3% increase in headline CPI which would see the annual rate dip to 2.8%. The manufacturing PMI is also scheduled today and has been marginally in expansionary territory in recent months. Industrial production and housing market data is released in the US.

Stuart Ritson is a senior Markets Strategist at BNZ Markets.