US labour market data the services ISM were weaker than expected. This rekindled hopes for rate cuts by the Federal Reserve later this year which underpinned equities. US treasury yields declined sharply but rebounded off lows

Global equity markets made solid gains on Friday. Weaker than expected US labour market data in conjunction with a soft services ISM pointed towards moderating economic activity, and rekindled hopes for rate cuts by the Federal Reserve later this year. The S&P gained 1.2%, the largest advance in more than two months. US treasury yields declined sharply after the data but rebounded off the lows while the US dollar was weaker against G10 currencies.

US nonfarm payrolls increased 175K in April. This was well below the 241k consensus forecast, and the smallest rise for six months. In addition, revisions subtracted 22k from the previous two months. The unemployment rate increased to 3.9% from 3.8% in March. Earnings growth was weaker than expected, and increased 0.2% in April, compared to forecasts for a 0.3% rise. This took the annual increase to 3.9%, the lowest in nearly three years.

The services ISM unexpectedly fell into contractionary territory for the first time since December 2022 as activity and new orders softened. The index fell to 49.4 from 51.4 in March compared with a forecast increase. Most of the decline in the headline index can be attributed to a sharp drop in the business activity index which fell to 50.9, the lowest level in four years. The prices paid subindex was a lot higher than forecast and rose to the highest level since June.

The payrolls and ISM data continued a recent series of weaker than expected activity data. The Citi economic surprise index, which measures actual data relative to expectations, has fallen sharply since mid-April and is now below zero. The market is pricing about 45bps of Fed rate cuts for this year, up from a minimum of 25bps in the lead up to the FOMC last week.

US treasury yields fell for a third consecutive session. 2-year notes were trading at 4.85% ahead of the data, and reached an intra-day low towards 4.70%, before rebounding to close down 6bps at 4.82%. Treasury market sentiment has improved since the Fed maintained an easing bias at the May FOMC with 2-year yields well below the 5.04% peak. 10-year treasury yields fell 7bps to 4.50%. The treasury market now looks ahead to supply this week.

The US dollar made a sharp move lower after the labour market data. At one point, the dollar index (DXY) was down nearly 0.7%, however it subsequently retraced to end 0.2% lower. The rebound in the DXY matched the retracement higher in treasury yields which gained additional impetus after the rise in the prices paid subindex from the services ISM. USD/JPY traded below 152, 5% below the peak from Monday last week, before closing near 153.

NZD/USD spiked to towards 0.6045 – the highest level in three weeks - after the payrolls data. The subsequent retracement was less than other G10 currencies, leading to an outperformance on the major cross rates. NZD/GBP and NZD/EUR traded close to 1-month highs at 0.4800 and 0.5600 respectively. NZD/AUD eked out modest gains, and briefly traded back above 0.9100, albeit within the context of a well-entrenched downtrend.

NZ fixed interest yields moved higher in the local session on Friday largely reflecting directional moves in offshore markets. At one point, 2-year swaps were marked below 5% but retraced higher to close down 4bps at 5.01%. The move lower across swap and government curves was parallel and of similar magnitude. 10-year government bonds closed at 4.83%, down 4bps on the day, and at the lowest yield level in three weeks.

Australian 10-year government bond futures are ~2bps lower in yield since the local close on Friday suggesting a modest downward bias for NZ yields to start the week.

There is no domestic data today. Caixin services PMI in China the only release of note on the international calendar.

[chart;daily exchange rates]