US equities have recovered a little after the slump following the Fed’s policy update yesterday. The US 10-year rate has pushed higher and the curve has steepened. The USD DXY index has appreciated to a fresh two-year high, with the gain post the Fed meeting extended after a slump in the yen after a dovish BoJ update.
There have been significant movements in the market since our report yesterday, which just pre-dated the Fed’s policy update. A “hawkish” 25bps rate cut was widely expected and while that was delivered, taking the Fed Funds target range down to 4.25-4.5%, the announcement included a number of hawkish surprises.
These included (1) a dissent by Cleveland Fed President Hammack, who voted to keep rates on hold, alongside a set of projections showing three other FOMC members – non-voters – who would have preferred to leave policy on hold, (2) projections showing just 50bps of cuts next year, in line with market pricing pre-meeting, but less than the 75bps that economists were widely expecting, (3) a distribution of Fed Funds projections that implied less comfort with the median view and (4) more evident uncertainty about the inflation outlook revealed in the projections.
Chair Powell’s press conference didn’t sway from the more hawkish policy bias. He noted the decision to cut rates at this meeting was a closer call compared to November and policy is now “significantly closer to neutral” after 100bps of rate cuts.
US equities tanked into the close while Treasury yields and the USD dollar shot higher. Following the near 3% fall in the S&P500 yesterday, the index has recovered 0.2% in early afternoon trading.
The US Treasuries curve has steepened, with 2s10s up to 27bps, the steepest since mid-2022. The 2-year rate has reversed course, down 5bps for the day, while the 10-year rate is up 6bps to 4.58% adding to the 12bps upward lift after Fed meeting. The move in the 10-year rate takes it to its highest level since the end of May. Market pricing for rate cuts next year has been significantly pared, with about 1½ cuts priced. The threat of a US government shutdown this weekend has risen with House Republican’s scrambling to rush through new legislation and with Trump making his view clear from the sidelines, wanting to drop some new pork-barrel spending from the bill.
US economic data released overnight didn’t move the needle, with initial jobless claims falling 22k to 220k last week, reversing the sharp increase the previous week which was affected by the Thanksgiving holiday. The four-week moving average has been pushing higher over recent weeks. In the third estimate of Q3 GDP, the annualised growth rate was revised up three-tenths to 3.1%, while the annualised core PCE deflator was revised up one-tenth to 2.2%. Existing home sales rose a stronger than expected 4.8% m/m in November, although they remain historically low. The Philadelphia Fed index showed a slump in manufacturing in December, with the index falling to an eight-month low of minus 16.4 against expectations for a lift to +2.8.
The USD DXY index rose to a fresh two-year high after the Fed announcement with broadly based gains. The overnight move has been more mixed. While the DXY index has extended its gain, this largely reflects a slump in the yen post the BoJ update and a softer GBP post the BoE update.
The BoJ kept policy unchanged, as widely expected, although one Board member voted for a 25bps rate hike. But in a dovish tilt, Governor Ueda said “it will take a long time before the full picture is clear for both the spring wage negotiations and the Trump administration’s policies”, reducing expectations that the BoJ would hike in January, delaying the decision until March/April. The yen tumbled, with further weakness overnight, seeing USD/JPY trade as high as 157.80, raising the chance that the MoF will have to step in and intervene to prevent or slow further yen weakness in the near future. The yen is 2½% weaker since this time yesterday and NZD/JPY is trading around 89.
The BoE kept its policy rate unchanged at 4.75% but the outcome was dovish, with the vote being 6-3 – Deputy Governor Ramsden and newest MPC member Taylor joining perennial dove Dhingra in voting for a 25bps cut. Governor Bailey said “we think a gradual approach to future interest rate cuts remains right…but with heightened uncertainty in the economy we can’t commit to when or by how much we will cut rates in the coming year.” The market priced in slightly more scope for easing next year, with two full cuts and a good chance of a third, while GBP weakened from as high as 1.2665 pre meeting to be currently 1.2515. NZD/GBP has recovered from a near-9 year low of 0.4460 yesterday afternoon to back just over 0.45.
The NZD fell to a fresh two-year low after the Fed meeting and slumped further after the NZ GDP release (see below). After trading at a low of 0.5608 in early afternoon trading, the NZD has recovered a little to about 0.5640. Supporting the recovery, yesterday the PBoC kept a strong hold on the Chinese yuan, in an attempt to limit its pace of depreciation, and preventing USD/CNY moving above 7.30, at least for now.
The NZ GDP release was a mixed bag. Optically it was terrible, with the economy contracting by a much larger than expected 1.0%, and Q2 heavily revised down to 1.1% q/q, suggesting the economy contracting at an annualised pace of more than 4% over the six-month period. But upward historical revisions meant that this contraction was off a much stronger base. Measured against the RBNZ’s November forecasts, the level of economic activity was 0.6% higher than expected, even if the more recent period showed a much deeper downturn. The ANZ business outlook survey confirmed optimism for the year-ahead in the face of lower interest rates.
The AUD followed a similar path to the NZD, dipping its toe to a low of 0.6199 before regaining its poise and recovering to 0.6250. Post the NZ GDP release, NZD/AUD fell 50pips to 0.9040 and it currently trades even lower at 0.9030 after a modest recovery overnight wasn’t sustained. NZD/EUR has recovered from a low just over 0.5410 to 0.5445.
In the domestic rates market, there was more attention on the slump in recent growth momentum than the upward revisions to GDP, driving down OIS rates, seeing the market add more than 10bps to next year’s rate cut profile. Curves were significantly steeper, with domestic forces driving down short-term rates and global forces driving up long term rates. Short-term NZGB yields closed lower in yield on the day, while the ultra-long bonds rose 6bps. In the swap market the 2-year rate fell 6bps to 3.50% against a 3bps lift in the 10-year rate to 4.01%. Terminal pricing for the OCR is now just over 3%.
In the day ahead, the economic calendar remains heavy, with the ANZ monthly NZ consumer confidence index and trade data, ahead of Japan CPI data this afternoon. The key US economic release tonight will be the PCE deflator, with the consensus slightly favouring a 0.2% m/m for the core rate, although many are picking a smaller 0.1% increase. US monthly spending and income data will also be released while retail sales data are released for the UK and Canada.
This is the last BNZ Markets Today for the year. Regular publication will resume in mid-January. We thank you for your readership over the year and hope you have a good break during the festive season.
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