More hawkish commentary from Fed speakers hasn’t perturbed the rates market, with US Treasury yields easing. Lower Canadian CPI inflation increases chance of BoC rate cut next month

More hawkish commentary from Fed speakers hasn’t perturbed the rates market, with US Treasury yields down slightly on the day.  US equities are flat and currency movements have been small, with the NZD trading just below the 0.61 mark. Domestic focus will be on the RBNZ’s MPS this afternoon, with expectations of little change in tone from previous messages.

It has been another uneventful trading session overnight. US equities are flat to marginally higher, with investors looking to keep their powder dry until after Nvidia’s earnings report due tomorrow.

US Treasury yields are down slightly across the curve, despite more hawkish commentary from FOMC members, including Governor Waller.  The 10-year rate is down 3bps to 4.41% for the day, with similar moves across other parts of the curve.

Fed Governor Waller, one of the more respected FOMC members, said in a speech on the economy “in the absence of a significant weakening in the labour market, I need to see several more months of good inflation data before I would be comfortable supporting an easing in the stance of monetary policy”, adding “we’re not seeing anything right now that looks like staying here for three or four months is going to cause the economy to go off a cliff”. Reading between the lines, Waller’s view seems to be a possibility of a September rate cut at the very earliest, and in a CNBC interview he suggested the Fed could cut at the end of this year, suggesting that his central view is more like a November or December timing.

Atlanta Fed President Bostic, a voter this year, repeated his message earlier in the week that he doesn’t expect a rate cut before the fourth quarter. The market is broadly in line with the Waller/Bostic view, with the first full Fed rate cut not priced until November, albeit close to 20bps priced by the September meeting.

Net currency movements have been small, with key majors we follow all within plus or minus 0.2% overnight against the USD. EUR, GBP and JPY all show very little movement. The NZD is trading just under 0.61, a small fall from this time yesterday and down slightly against most other majors.

CAD is on the slightly weaker side after CPI inflation in Canada slowed, as expected, to 2.7% y/y in April, with the core measure (average of median and trimmed mean) down to 2.75%, a larger fall from an upwardly revised 3.05% in March. The data raised the question whether it meets the criteria BoC Governor Macklem laid out for an easing of a “further and sustained easing in core inflation”.  Following the report, the market priced in a greater chance of easing at the next meeting in June, from 11bps to 15bps, representing a 60% chance of a 25bps cut – the only doubt being whether it waits until the July meeting, where 29bps is priced.

USD/CAD is up a little to 1.3655 and NZD/CAD is flat at 0.8320. The AUD is flat at 0.6665 and NZD/AUD is down a touch to 0.9145.

The GDT dairy auction showed a 3.3% lift in the price index, another positive surprise, with solid gains across all product lines, including a 2.9% lift in whole milk powder and 3.5% for skim milk powder. Fonterra is due to provide its first milk price forecast for the next (2024/25) dairy season sometime before the end of May. Market conditions suggest something above the current forecast for the season just ending.

In the domestic rates market, the NZGB curve showed a small steepening bias, with rates held flat at the short end of the curve and up 3bps for the ultra-long bonds. Swap rates were little changed, with the 2-year rate down a touch and the 10-year rate up a touch, ahead of today’s RBNZ Monetary Policy Statement this afternoon. We think that the economy is tracking weaker than the Bank previously projected, while inflation is proving to be stickier, but ultimately weaker growth will drive down inflation. We don’t envisage much change in messaging or the projected OCR track, which doesn’t see rate cuts until next year.  A statement along these lines should result in little sustained market reaction.

UK CPI inflation data tonight should show a sharp fall in inflation, driven by a sharp fall in household energy bills, taking annual inflation down to just 2.1%. Focus will be on how sticky inflation remains for the services sector.