Global equity markets saw strong gains on Friday due to weaker than expected US labor market data and soft services ISM, leading to renewed hopes for Federal Reserve rate cuts later this year. The S&P rose by 1.2%, its largest increase in over two months. US treasury yields initially fell sharply before rebounding, while the US dollar weakened against G10 currencies.
In April, US nonfarm payrolls only increased by 175K, well below the expected 241K and the smallest rise in six months. The unemployment rate also rose to 3.9%. Earnings growth was weaker than expected, increasing by only 0.2% in April, the lowest in nearly three years.
The services ISM unexpectedly fell into contraction territory for the first time since December 2022, with activity and new orders softening. The decline was mainly due to a sharp drop in the business activity index. The prices paid subindex rose to its highest level since June.
The Citi economic surprise index, which measures actual data relative to expectations, has fallen sharply since mid-April. The market is now pricing about 45bps of Fed rate cuts for this year, up from a minimum of 25bps before the FOMC last week.
US treasury yields fell for a third consecutive session, with 2-year notes reaching an intra-day low before rebounding. The US dollar initially dropped after the labor market data before retracing some losses.
NZD/USD spiked to its highest level in three weeks after the payrolls data, outperforming other G10 currencies. NZ fixed interest yields moved higher on Friday, reflecting global market movements.
Australian 10-year government bond futures suggest a modest downward bias for NZ yields at the start of the week. There is no domestic data today, with Caixin services PMI in China being the only notable international release.