US equities have rallied, US Treasury yields have fallen and the USD is weaker, as Chair Powell hasn’t been as hawkish as feared, following the widely anticipated 75bps hike from the Fed. The NZD has recovered after taking another look below 0.62. NZD/AUD has traded at its lowest level in nearly five years.
The Fed hiked the Fed Funds target range by another 75bps to 2.25-2.50% and guidance remained unchanged that ongoing increases in the target range will be appropriate. There were no dissents, so Esther George was brought into line, after arguing for a smaller 50bps hike at the previous meeting. There were only minor tweaks to the press statement. The key change was removal of the line about overall economic activity picking up and replaced with “recent indicators of spending and production have softened”, a nod to the weaker flow of recent data.
In his press conference, Chair Powell was appropriately hawkish, but the market evidently chose to hear what it wanted to hear, and that was for any hint that the pace of rate hikes would recede. Powell didn’t rule out another 75bps hike in September and said the committee wouldn’t hesitate to do a larger move if needed, but rate decisions would be data dependent. Before the September meeting, there are another two CPI and employment prints.
The market was more interested in any dovish commentary and hooked onto Powell’s comment that it was likely appropriate to slow rate increases at some point. Powell noted that policy needed to get to at least a modestly restrictive stance, and suggested that the 3.25-3.50% rate implied in the last dotplot remained appropriate. With three meetings left for the year and another 100bps likely based on this projection, that implies a 50bps hike in September followed by two 25bps hike in November and December.
Ahead of the Fed announcement and Powell’s press conference, US stocks were much stronger, driven by a rally in tech companies, after Microsoft and Google reported earnings and guidance better than investors feared, seeing some spillover into other companies. The rally has extended further after Powell’s words, with the S&P500 up from a 1½% gain to now about 2½%.
With Powell not as hawkish as feared, US rates across the curve have fallen in the aftermath, with the market paring back future tightening, slicing off about 7bps worth of hikes for the remaining meetings this year. On the day, 2 and 10-year Treasury rates are currently down 6-9bps.
The USD was flat heading into the Fed announcement and had since weakened, with dollar indices down 0.6% on the day. The NZD traded below 0.62 ahead of the meeting and has since recovered to 0.6260. The AUD has traded as high as 0.70 in the aftermath. GBP is the strongest major for the day, up over 1% to 1.2170.
The higher NZD/AUD cross rate following Australian CPI data (see below) was fleeting, and reversed course through the night and broke below the mid-June low to trade as low as 0.8921, currently back just over 0.8950.
US data released were, for a change, on the stronger side of expectations, reducing the chance that US Q2 GDP will print negative in tonight’s release. Durable goods orders rose 1.9% in June, boosted by defence aircraft. Excluding transportation, the figure was more in line, rising by just 0.3%. The goods trade deficit came in about $5b lower than expected at $98b, which will help the net exports contribution, while stronger inventories data for the wholesale and retail sectors will reduce their expected negative contribution to GDP. The Atlanta FedNow estimate for GDP was revised higher to minus 1.2% from minus 1.8%. The consensus remains at +0.4% (annualised), but this likely excludes some last minute upward revisions.
On the weaker side of the ledger, the extent of the housing market downturn continues to shock the consensus, with pending home sales plunging by 8.6% in June, following on from yesterday’s big downside miss on new home sales. Germany continues to look like being on the verge of recession. Consumer confidence fell to minus 30.6, the lowest reading since the survey began in 2006.
Australian annual headline CPI inflation came in lower than expected at 6.1%, although the key core measure based on the trimmed mean was in line on a quarterly basis at 1.5% q/q and higher than expected on an annual basis at 4.9%. The market clearly feared a much stronger result, with rates falling after the release, the 2-year swap rate ending the day down 18bps and the 10-year bond yield down 9bps – the data seemingly cementing in another 50bps hike next week, and not strong enough for the RBA to contemplate a super-sized 75bps move.
Lower Australian rates spilled over, to some extent, into NZ rates. The 2-year swap rate closed the day down 4bps at 3.95%, while longer term swap rates fell 7-8bps. NZGB yields were down 6-7bps across the curve through to the 10-year maturity, with that bond yield down to 3.53%.
The ANZ business outlook survey is released today, which is expected to remain as gloomy as ever, as stagflation prevails. Tonight sees the release of Germany CPI, US GDP and jobless claims. As noted, the consensus picks that US GDP will be slightly positive but a downside surprise which sees a negative print would get a headline of technical recession and lots of media attention, but the “real” chance of recession is in the future than lies in the past.
President Biden and Xi will hold a phone call Thursday US time, as tensions escalate over the planned visit to Taiwan by Nancy Pelosi. China recently issued a harsh warning suggesting a possible military response if the visit goes ahead.
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