Benign US CPI data supports a decline in US treasury yields. US equities were stable after the previous session's AI-driven selloff. Currency markets subdued

US equities were little changed into the weekly close, stabilizing after the previous session's AI-driven selloff. Stocks gained initially after softer-than-expected CPI data which saw the market price in additional easing by the Federal Reserve for this year. However earlier gains for US stocks had faded by the close. Major indices in Europe were mixed while Asian equities closed lower. Treasury yields declined and the US dollar was marginally softer against G10 currencies although absolute moves were not large.

US CPI rose 0.2% in January, the smallest increase since July, with lower energy prices providing a meaningful drag. Services inflation firmed, but this was offset by continued stability in core goods prices. Core CPI increased by 0.3%, in line with expectations, taking the annual rate down to 2.5%, the lowest since 2021. January CPI readings have been strong in recent years given annual price resets, and many economists had called for a larger lift this time, particularly amid concerns that firms would pass more tariff‑related costs to consumers.

A New York Fed study has found that close to 90% of the 2025 tariff burden was borne by US firms and consumers, with pass‑through running above 85% even late in the year. Foreign exporters absorbed only a modest share, with a 10% tariff cutting export prices by just 1.4% by November. While the post ‘Liberation Day’ tariff surge briefly pushed the average US rate into double digits, exemptions and supply‑chain re‑routing limited the impact and accelerated shifts away from China toward Mexico and Vietnam instead.

Treasury yields declined across the curve following the softer‑than‑expected CPI outcome. The market pulled forward expectations for the first Fed rate cut to June, reversing the post‑payrolls shift toward July seen last week. The front end led the move, with two‑year yields falling toward their lowest level since 2022. Money markets are pricing around 63bp of easing in 2026, implying close to a 50% probability of a third cut by December. Ten‑year Treasury yields closed at 4.05%, 5bp lower on the day.

The US dollar was broadly stable against most G10 currencies registering small net moves compared with the local close on Friday. NZD/USD oscillated in narrow range around 0.6030. The NZD edged higher against the AUD having traded below 0.85 and to multi-year lows last week. The latest CFTC positioning report showed that speculative accounts continue to hold a sizable short position in NZD futures contacts while AUD longs have increased.

In commodities markets, Brent crude prices were little changed near US$68 per barrel as market participants balance oversupply concerns and with geopolitical dynamics. Extended US‑Iran nuclear talks have reduced near‑term supply risks, while the IEA warns of a record global crude surplus in 2026. Precious metals closed higher - gold prices traded back above US$5,000 per ounce.

NZ swap rates declined and the curve flattened in the local session on Friday reflecting moves in offshore markets. 2-year rates dropped 2bp to 3.10% while 10-year rates closed 4bp lower at 4.13%. There was limited market reaction to the PMI or the RBNZ’s inflation expectations series which edged higher. The 2y/10y swaps curve flattened to 104bp. 10-year government bonds closed 5bp lower at 4.47%. A further decline is possible on the open. Australian 10-year bond futures are 3bp lower in yield terms since the local close on Friday.

The services PMI for January is released today. The index rose to 51.5 in December, the service sector’s first expansionary reading since February 2024. Electronic card transactions are also scheduled. Economists expect Japan’s Q4 GDP to rebound after contracting in the previous quarter. There is limited data overnight and a public holiday in the US is likely to weigh on market activity.

Stuart Ritson is a Markets Strategist at BNZ Markets.