Softer than expected US CPI data contributed to large moves across global markets ahead of the FOMC. Bond yields fell sharply as investors increased the amount of easing expected by the Fed this year. The US dollar declined. Equity markets advanced with the S&P making a fresh all-time high. The US Federal Reserve (Fed) left rates unchanged as expected. The Fed’s forecasts signalled one 25bps rate this year, down from 75bps in March.
US CPI data for May was released ahead of the FOMC and was lower than consensus estimates. Core inflation increased 0.2% m/m, below expectations for 0.3% gain. This took the annual core rate to 3.4% which is the slowest pace in more than three years. Super core services inflation ex housing declined marginally and was the first negative reading since September 2021.
The Fed left rates on hold for a seventh straight meeting as was unanimously expected. The accompanying statement outlined ‘modest further progress’ had been made towards its inflation goal in recent months. Previously the statement had pointed to a ‘lack’ of further progress.
The FOMC revised up its 2024 core PCE deflator forecast to 2.8% from 2.6% in March. The median FOMC member forecasts one 25bps rate cut by the end of the year compared with 75bps in March. However, policy makers increased the amount of easing expected in 2025 to 100bps from 75bps previously. Fed policy makers also lifted forecasts where they see rates settling over the long term.
The key message from the initial stage of Chair Powells press conference was little changed from the May meeting. He outlined the restrictive stance of monetary policy will be retained to reduce inflationary pressures. Policy makers are ‘data-dependent’ and want to see more good inflation data before signalling that they are ready to ease.
US treasury yields moved sharply lower following the CPI data as the market moved to fully price two rate cuts by the Fed this year. 2-year treasuries declined 15bps to 4.69% before paring some of the move following the FOMC. It was a largely parallel shift lower with 10-year yields dipping 14bps to 4.26%. 10-year yields pushed below the early June lows to reach levels not seen since early April.
Lower yields weighed on the US dollar which made broad-based losses. The dollar index fell almost 1% at one point to retest the lows from early April. The yen gained 0.5% against the dollar benefitting from lower treasury yields. The Nikkei reported that the Bank of Japan is to ‘weigh cuts to government bond purchases’ ahead of its policy meeting tomorrow.
The pound moved in line with global currencies and looked past UK monthly GDP which showed flat growth in April as adverse weather weighed on the services sector and construction. This follows a strong rebound for the economy in Q1. There was limited market reaction to data showing subdued inflation in China set against the backdrop of weak domestic demand amid a prolonged real estate slump and weak job market.
The NZD was among the best performing G10 currencies gaining more than 1% against the dollar. NZD/USD traded back above 0.6200 to match the highs from February. The NZD gained on the major European cross rates and is little changed against the AUD.
NZ fixed income yields were little changed in the local session yesterday. 10-year government bonds increased 1bp to 4.74%. New Zealand Debt Management are tendering NZ$$500 million of nominal NZGBs today split across Apr-29 ($250m), May-32 ($200m) and May-37 ($50m). Australian 10-year bond futures are ~11bps lower in yield overnight, suggesting a downward bias to NZGB yields on the open.
Australian labour market data for May is released today. The unemployment rate is expected to dip to 4% from 4.1% in April which was impacted by a lift in the participation rate. US PPI data will allow finetuning of PCE deflator forecasts ahead of its release at the end of the month. Initial jobless claims have picked up in recent weeks though may be impacted by seasonal adjustment factors.
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