NZD outperformed amongst G10 currencies

US producer price inflation data surprised to the topside which led to reduced expectations for easing by the US Federal Reserve. US treasury yields reached the highest level for this year. The higher yield backdrop provided a headwind for equities with the S&P falling 0.5% during the session to end the week little changed. The Nikkei continued its stellar run. It is up 15% year to date and is just 1% below its all-time high reached in December 1989. Credit spreads were stable near the tightest levels in 2-years and the US dollar ended little changed on the major crosses.

US PPI, a leading indicator of consumer prices, rose 0.3% in January, above the median estimate for a 0.1% increase. Core producer prices increased 0.5%, which was well above consensus of 0.1%, and is attributed to services prices. The upside surprise, following a similar unexpected rise in consumer prices, will raise concerns about the broader inflation trajectory. However, the disinflationary process is not likely to be linear, and one month does not change the broader trend. The PPI release implies that core PCE for January will pick up from Q4-23 levels.

The University of Michigan’s consumer sentiment index reached its highest level since mid-2021. Sentiment has been underpinned by rising equity markets and falling inflation. Within the report, inflation expectations over the next five-to-ten years were unchanged at 2.9%. This is above the pre-covid levels but should drift lower in coming months reflecting lower actual inflation. There was a large fall in US housing starts but this appears to be monthly variability around the modest uptrend.

US treasury yields spiked in response to the PPI data. 2-year yields made fresh highs for the year (4.72%) before drifting lower to end the session up 6bps at 4.64%. 10-year treasuries ended 5bps higher at 4.28%. The market is pricing ~90bps of easing this year, which is close to Fed policy maker’s projection of 75bps. Just two weeks ago, market pricing implied around 150bps of cuts.

UK retail sales data for January outstripped even the most optimistic economist estimates. Core retail sales rebounded 3.2% on the month following a slump in December. The data helped to dispel some of the gloom around the economy which was confirmed to be in a technical recession in H2-2023. Other forward-looking indicators suggest the UK economy has started the year on a firmer footing.

The US dollar rallied following the PPI data but retraced to end little changed against major currencies. The CTFC futures positioning data revealed speculative accounts have flipped to net long dollar positions. This position shift is a function of the dollar’s strong start to the year. NZD/USD outperformed within the G10, and gained close to 0.5% from the local close, though there wasn’t any obvious catalyst for the move.

The NZ yield curve steepened in the local session on Friday. Front end swaps ended unchanged at 5.14% while 10-year yields gained 5bps to 4.67%. Government bonds outperformed swaps in the longer end as the market looks ahead to the likely syndication of the new nominal 2054 maturity this week. Australian 3 and 10-year bond futures are ~3bps higher in yield since the local close on Friday suggesting an upward bias to NZ yields on the open.

It is a quiet start to the week from a data perspective and the public holiday in the US will dampen market activity. The only release of note is the services PMI which slipped below 50 into contractionary territory in December. The manufacturing PMI, released Friday, showed the activity in the manufacturing sector improved in January, but continued to contract.

[chart;daily exchange rates]

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