US equities gained on resilient activity data and softer core PCE inflation, with the Nasdaq outperforming. The US yield curve steepened as Fed hike expectations eased, while 10- and 30-year US Treasury yields reached fresh highs

US equities advanced as data pointed to resilient economic activity while a key inflation measure printed below expectations. Revised figures showed the economy grew faster than expected in the second quarter, while consumer spending recorded its strongest monthly increase in more than a year in August. The S&P 500 was up around 0.5% in afternoon trading, with the Nasdaq outperforming, in contrast to weaker European equity markets. The US Treasury curve steepened as 30-year yields reached a fresh multi-year high. Oil prices rose, while the US dollar was mixed against G10 currencies.

US real consumption rose 0.6% m/m in August, above the 0.5% consensus, providing further evidence that economic activity remains resilient despite elevated inflation. The Fed’s preferred measure of underlying inflation increased by a smaller-than-expected 0.2%, although the reading was affected by an anticipated technical adjustment. Annual core PCE inflation eased to 3.0%, below both the 3.3% consensus and the 3.2% estimate Fed Chair Warsh provided at the post-FOMC press conference.

Markets pared expectations of an October Fed rate hike following the PCE release, with the implied probability falling to around 40%. The repricing began a day earlier after a Fed official indicated the central bank was in no hurry to tighten further. 2-year Treasury yields initially declined by almost 5bp after the data, before retracing to stand little changed near 4.88%. By contrast, the intermediate and long ends remained under pressure. 10-year yields reached a fresh cycle high of 5.29%, while the 2s10s curve steepened 5bp to +41bp.

Headline inflation across several euro area economies was higher than expected, supporting the case for further ECB tightening. Annual inflation reached 3.4% in France, 4.1% in Italy and 3.3% in Germany, with energy prices remaining the main driver. ECB pricing was little changed, with around 30bp of tightening priced across the two remaining meetings this year. Euro area CPI data is scheduled tomorrow evening. Marker reaction was minimal with German yields lower across the curve led by the front end.

After an initial decline, the US dollar index rebounded following the economic data, although net moves across most G10 currencies were modest. Sterling outperformed and the AUD lagged, with no clear catalysts for either move. NZD/USD reached an offshore session high near 0.5660 as the DXY weakened, before retreating towards 0.5630. It is now only marginally above its 2026 low of around 0.5625, reached in June.

China’s September PMIs pointed to renewed expansion, with the official manufacturing index rising to 50.1, non-manufacturing returning to positive territory at 50.2, and private surveys improving by more than expected. The firmer data coincided with the government’s largest stimulus effort in two years, increasing the likelihood that growth returns to the 4.5%–5% annual target range. Even so, the economy remains bifurcated, as resilient exports contrast with near-zero consumption growth, weak business confidence and contracting investment.

NZ rates rallied strongly during yesterday’s local session, led by offshore developments. Yields opened lower and extended their decline after softer-than-expected Australian CPI data. Two-year rates closed 9bp lower at 4.05%, while 10-year rates fell 7bp to 4.76%. The government bond curve broadly matched the move in swaps, with 10-year NZGB yields falling 9bp to 5.04%. NZGBs are trading around 20bp through US Treasuries, the tightest spread since early 2025. Today’s weekly tender will offer the May-2031 (NZ$250m) and May-2035 (NZ$200m) lines.

Building consents for August are the only domestic data release today. In Japan, the quarterly Tankan survey is expected to show firmer business sentiment and higher inflation expectations. US jobless claims are expected to remain near 200k, while the jump in the preliminary PMI suggests the ISM manufacturing index should remain elevated. ECB President Lagarde is also due to speak on a panel.

Stuart Ritson is a senior Strategist at BNZ Markets.