The US Federal Reserve began its easing cycle with a 50bps rate cut. The US dollar fell alongside treasury yields while equity markets gained immediately following the decision

Global asset markets were generally stable overnight ahead of the widely anticipated US Federal Reserve’s (Fed) interest rate decision. The Fed began its easing cycle with a 50bps cut in the Fed Funds Rate. This was larger than the economists’ estimates for a 25bps reduction, but market pricing implied around a 70% chance of a larger 50bps cut. It was not a unanimous decision with Governor Michelle Bowman dissenting in favour of a 25bps reduction. The US dollar fell alongside treasury yields while equity markets gained immediately following the decision.

The Fed has gained greater confidence that inflation is moving sustainably towards 2% and judges the risks to achieving its employment and inflation goals are roughly in balance. The decision to opt for a bigger initial cut suggests the central bank wants policy settings to be closer to neutral. The Fed will consider ‘additional adjustments to rates’ based on incoming data, the evolving outlook and the balance of risks.

In updated projections, the median FOMC member forecast 50bps of rate cuts by the end of the year and a further 100bps in 2025. Fed policy makers also lifted forecasts where they see rates settling over the long term to 2.9% from 2.8% previously. In the summary of economic projections, unemployment forecasts were revised higher, and inflation forecasts were decreased compared with June.

Chair Powell noted in the press conference that the Fed is not on any preset course and that it will continue making decisions meeting by meeting. He said the risks to employment and inflation were roughly in balance. He also said that the recalibration process will take time and that no one should look at the 50bps cut and say this is a new pace.

US treasury yields, which were modestly higher ahead of the FOMC, fell sharply following the decision led by the front end of the yield curve as the market priced additional easing for this year. 2-year yields dropped to a low of 3.54%, a new low for the cycle, before retracing. 10-year yields are little changed at 3.68%.

The US dollar fell sharply, in line with the move lower in front end treasury yields and made broad based losses against G10 currencies. The dollar index (DXY) fell more than 0.5% to the lowest level in a year before partially retracing the move. NZD/USD moved higher amid the weaker US dollar backdrop, peaking above 0.6260, before pulling back.

UK inflation for August was in line with consensus estimates. Headline CPI increased 2.2% on an annual basis while core increased 3.6%. Services inflation, the BOE’s key measure of domestic price pressures, was also in line with consensus estimates at 5.6%. The data didn’t materially alter expectations that the Bank of England will keep rates on hold at its meeting this evening.

It was a quiet local session for NZ fixed income yesterday ahead of the FOMC. The swap curve moved 3bps higher in a parallel shift reflecting offshore moves. 2-year swap rates closed at 3.65%. The government curve also shifted 3bps higher with 10-year NZGBs ending the session at 4.12%.

The NZGB market looks ahead to the weekly bond tender this afternoon. New Zealand Debt Management is tendering NZ$500 million of nominal NZGBs today split across May-31 ($250m), May-34 ($200m) and Apr-37 ($50m).

Australian 10-year government bond futures are ~3bps higher in yield since the local close yesterday, suggesting a modest upward bias for NZ yields on the open.

NZ Q2 GDP data is released today. We forecast the economy contracted by 0.4% during the quarter compared with the RBNZ’s -0.5% projection from the August Monetary Policy Statement. In Australia, the consensus looks for unemployment rate to remain unchanged at 4.2% and monthly employment growth of 26k, continuing the recent solid trend.

The Bank of England is unanimously expected to leave rates on hold at 5.0% having delivered the first 25bps cut of the cycle in August. The committee will likely require further evidence that wages and services inflation is cooling with a new set of forecasts available for its November meeting.