Conflict in the Middle East continues to weigh on investor risk appetite. Brent crude closes the week above US$100 per barrel. US dollar makes broad based gains

Elevated oil pieces remain in focus as geopolitical tensions escalated, with Iran stepping up attacks in the Strait of Hormuz and the US moving to bolster its military presence in the region. Risk sentiment remained fragile, with global equities closing lower and credit spreads continuing to widen. The S&P erased an earlier near‑1% gain as the US intensified strikes on Iran, raising the risk of further escalation. After initially rallying on soft economic data, treasuries lost momentum, with long‑dated yields underperforming. The US dollar made broad based gains with the soft risk tone contributing to weakness in the NZD and AUD.

Brent crude prices held above US$100 after one of the most volatile weeks on record, with supply concerns intensifying as Iran pledged to keep the Strait of Hormuz effectively shut. The near‑halt to shipping through the key chokepoint has disrupted flows of crude, gas and refined products, pushing prices higher and stoking inflation fears. The US issued a narrowly tailored waiver allowing the sale of Russian oil already in transit, but this has a limited lasting impact on prices.

US data painted a mixed picture, with consumer momentum remaining soft while inflation pressures stayed firm. Inflation‑adjusted consumer spending rose just 0.1% in January, while the Fed’s preferred core PCE measure increased a solid 0.4% which saw the annual rate edge higher to 3.1%. The release of PPI data this week will help firm up expectations for the February core PCE deflator. Fourth‑quarter growth was revised materially lower, and consumer sentiment slipped to a three‑month low amid higher energy prices. Medium term inflation expectations counterintuitively declined but the survey period began before the war had started.

US Treasury yields ended the session on Friday modestly higher across the curve, with the 10‑year note up 2bp to 4.28%, the highest since early February. Yields rebounded from a dip after the economic data. Rates markets have pushed out the timing of the first cut, with around 23bp of easing priced for this year and a full quarter‑point reduction now fully priced march‑2027, as several economists at major US banks have further delayed their rate‑cut forecasts.

The US dollar made broad based gains against G10 currencies pushing the dollar index to the top end of its multi-month trading range. The greenback has been underpinned by a paring back of Fed easing expectations, as rising energy prices fuel concerns that inflation pressures may persist. USD/JPY traded up towards 160 but the yen outperformed against the stronger dollar backdrop. The Canadian dollar declined in line with other G10 currencies despite weaker-than-expected labour market data. NZD/USD fell below 0.5800 and the NZD is softer against the yen and euro.

Curve flattening was the dominant theme for NZ fixed income in the local session on Friday. The front end was weak following offshore markets with 2-year swap rates closing at 3.33%, 6bp higher on the day and notably at fresh multi-month highs. Meanwhile the longer end of the curve closed unchanged with the 2y/10y swaps curve flattening to +97bp. The market is pricing close to 60bp of tightening by the end of the year. There was a similar flattening theme for the government curve. 10-year bonds closed unchanged at 4.66%. The ultras outperformed with the May-54 closing 4bp lower.

The domestic focus today will centre on the services PMI. This index dipped to 50.9 last month and although the manufacturing PMI was robust in February, the services reading will need to advance to be consistent with our growth forecasts. NZ electronic card transaction data for February is also scheduled. In China monthly activity data will be released including retail sales and industrial production.

Stuart Ritson is a Markets Strategist at BNZ Markets.