Choppy market conditions overnight but net movements modest. Oil prices are lower. US Treasury yields push higher after earlier falls as risk of war in the Middle East fades. Domestic focus on RBNZ MPS

Market conditions have been somewhat choppy overnight.  US equities are flat in early afternoon trading, recovering from earlier falls.  The US 10-year rate is slightly higher after taking a peek below 4.02 overnight.  Oil prices are lower after earlier gains, following tentative agreement on principles towards a US-Iran nuclear deal.  The NZD is net flat, while GBP is the weakest of the majors following softer labour market data.

Early in the US trading session, IT stocks got whacked, but they have since recovered.  The S&P500 was down as much as 0.9% before the move faded and it is currently flat. Choppy trading conditions have become the norm as the sentiment ebbs and flow on AI-related stocks and investors trying to determine which ones will end up the winners and losers.  The Euro Stoxx 600 index closed up about ½%.

The US 10-year Treasury yield extended the fall seen during NZ trading hours to a low of 4.015% before staging a decisive turnaround and it currently trades at 4.05%, up slightly from the NZ close. Some of that move can be attributed to better risk sentiment following de-escalation of tensions in the Middle East.

Following talks between Iran and the US, Iran’s foreign minister said they were able to reach a general agreement on a set of guiding principles for a potential nuclear deal.  A third round of talks has been scheduled which will be “more difficult and detailed”, but with a view towards drafting a potential agreement that would lead to a lift in sanctions on Iran in exchange for major restrictions on its nuclear programme.

Brent crude is currently down over 2% to USD67 per barrel.  A muted market reaction reflects market caution regarding the prospect of any so-called agreement. Earlier in the session Brent crude had risen above USD69 ahead of the “agreement” and after Supreme Leader Khamenei threatened retaliation against the US if it strikes the country.

In economic news, UK labour market data showed the unemployment rate ticking up to a fresh five-year high of 5.2% in December, while there were further signs of moderating wage inflation, with the key private sector figure excluding bonuses falling to a five-year low of 3.4% y/y.  Tax data showed the number of payrolled employees fell 134k in the year to January.

The data slightly added to the chance that the BoE would cut rates by March, rather than wait until April.  After last month’s 5-4 vote to keep policy changed, only one MPC member has to flip.  UK Gilt yields didn’t fall any more than the rest of Europe, but GBP reacted and it is the weakest of the majors overnight, falling below 1.35 at its low while NZD/GBP pushed up to a fresh six-month high just under 0.4460.

Canadian CPI data were at the weaker end of expectations, with annual headline inflation nudging down to 2.3% in January, and the average of the trimmed mean and median core measures falling to 2.45%. Market reaction was limited to the extent that there is strong consensus that the Bank of Canada has finished cutting rates for the cycle with the policy rate already down at 2.25%.

There were only second tier US economic data, with homebuilder sentiment measured by the NAHB housing market index falling to a five-month low of 36.  The Empire manufacturing survey showed little change in business conditions for NY manufacturers while future business conditions, capex and employment indicators all continued to trend higher, consistent with other regional indicators for the sector.

In currency markets, in addition to the weaker GBP noted, JPY is on the softer side of the ledger. Commodity currencies and EUR show little net move against the USD overnight.  After rising towards 0.6050 and then falling towards 0.60, the NZD is flat around 0.6030. 

In the overnight GDT dairy auction, the price index rose strongly for a fourth consecutive event, up 3.6%, building on the strong recovery seen in 2026 to date, following the lurch down during the second half of last year.

The domestic rates market was quiet yesterday, with rates marked lower on the back of offshore moves.  NZGBs were marked down 2bps across the curve while swap rates were marked down 2-3bps.  Monthly CPI indicators for January didn’t alter our Q1 CPI estimate of 0.5% q/q and 2.7% y/y.

In the day ahead the domestic focus will be on the RBNZ’s Monetary Policy Statement this afternoon.  There is strong consensus that the Bank will hold policy steady and revise higher its interest rate projections, but there is lingering uncertainty over the tone and language that Governor Breman will convey at her first policy meeting.

On the global economic calendar, Australian wages data are released today, with UK CPI and second-tier US data released tonight.  Annual UK headline and core inflation is expected to show a drop of 3.0% for January.

Jason Wong is the senior Markets Strategist at BNZ Markets.