US retail sales and consumer sentiment were weaker than expected. The post-data US Treasury rally reversed, with 10-year yields ending near 4.70%. Long ends of European curves come under pressure

Global equity markets were little changed at the end of last week. The S&P 500 closed marginally lower but remains close to record highs. Softer-than-expected US consumer data contributed to an initial rally in Treasury yields, although the move quickly reversed. European government bond yields also moved higher, led by the long end, which reached multi-decade highs. The US dollar was broadly weaker against G10 currencies. Brent crude fluctuated near $88 a barrel after US Treasury Secretary Bessent threatened “unprecedented” economic measures against Iran, including the continued naval blockade of Iranian ports.

Volatility across equity and currency markets has continued to decline. The VIX index, a gauge of expected S&P 500 volatility, has fallen towards 14, its lowest level since December. That appears consistent with investors assigning a low probability to renewed market disruption, even as oil prices approach $90 a barrel. The decline in implied volatility suggests a degree of investor complacency toward geopolitical risks and their potential market impact.

US retail sales were weaker than expected in July. Headline sales fell 0.6% m/m, partly reflecting lower gas prices. The data may have been affected by Amazon Prime Day, which fell in late June this year rather than July. Core retail sales, which exclude gas and autos, were also softer than the consensus estimate. Sales in the “control group” categories, which feed into GDP calculations, fell 0.4%, the first monthly decline this year.

The Michigan consumer sentiment index fell to 51.0 in August, below the 55.0 consensus. Sentiment remains above the lows reached earlier this year, but price pressures and concerns about the economic effects of the Iran conflict continue to weigh on consumers. One-year-ahead inflation expectations edged up to 4.3% from 4.2% in July, while five-to-ten-year expectations were unchanged at 3.3%. Both measures remain around 0.5% below their May highs.

The weak data initially contributed to a dip in Treasury yields, but the move was quickly unwound. Two-year yields fell to 4.10% before reversing to 4.17%. The curve steepened, with 10-year yields making a shallower initial move lower before trading up towards 4.70%. The price action has been poor given the recent run of weaker-than-expected activity data and last week’s benign CPI print. European bond markets were also under pressure, although there was no clear catalyst for the move, pushing longer-dated French and German yields to multi-decade highs. Ten-year bund yields closed 7bp higher at 3.20%.

The US dollar declined against the G10 currencies, although moves were modest. The DXY has remained in a narrow range this month, after falling sharply at the end of July. The yen and Swiss franc underperformed and were little changed against the dollar. NZD/USD steadily rose through the offshore session on Friday, reaching a peak just below 0.5900. Moves across most NZD crosses were small, although NZD/JPY traded up towards 93.90.

NZ yields rose and the curve steepened in Friday’s local session, without an obvious catalyst apart from a reversal of the previous day’s outperformance. The only domestic data release was the manufacturing PMI, which eased to a still healthy 54.3 after a spike higher in June. The 2-year swap rate ended 2bp higher at 3.65%, while the 10-year rate closed 4bp higher at 4.39%. The government curve saw a similar adjustment. Australian 10-year bond futures imply yields around 5bp higher since the local close, suggesting an upward bias for NZ rates on the open.

The domestic economic calendar is front-loaded this week, with the July services PMI, card spending and partial inflation indicators due for release today. The services PMI edged back above 50 in June, after several months in contractionary territory. The monthly inflation partials will provide an important baseline for Q3 CPI. Offshore, Japan releases Q2 GDP, while China publishes monthly activity data. Canada CPI is also due, with markets looking for further evidence on the underlying inflation trend.

Stuart Ritson is a senior Strategist at BNZ Markets.