Global asset markets in holding pattern ahead of the FOMC. Bank of Canada cuts rates by 25bp. Australian Q4 CPI softer than expected increasing the chance for a RBA rate cut in February

US markets are broadly stable in the absence of first-tier economic data as investors look ahead to the Federal Reserve’s rate decision this morning (NZT). The S&P is modestly weaker and down close to 0.3% in early afternoon trade. Stock indices in Europe advanced with the Euro Stoxx closing 0.6% higher. Global bonds are little changed, and the US dollar is marginally stronger against G10 currencies.

The Bank of Canada (BOC) cut rates by 25bp to 3.0% in line with expectations. It sees inflation remaining close to its 2.0% target and the economy strengthening gradually. The accompanying statement removed forward guidance on future rates moves, given the uncertainty about potential tariffs. The Bank also announced it plans to end quantitative tightening, and begin buying assets in March, to stabilise settlement balances.

Most G10 currencies are marginally weaker against the US dollar overnight. USD/CAD traded higher into the BOC rates decision but was stable in the aftermath. The AUD consolidated, after falling in the Asian session yesterday, following softer than expected inflation data. NZD/USD dipped towards 0.5635 but has since recovered from the session lows. NZD/AUD retained the post-CPI gains and traded up towards 0.9080.

Australian core CPI eased more than expected in Q4 contributing to a rally in rates markets and a weaker AUD. The trimmed mean measure rose 3.2%, below consensus and the RBA’s projection from the November SoMP. The market is almost fully discounting a 25bp rate cut at the February monetary policy meeting.

RBNZ Chief Economist, Paul Conway’s speech was not impactful for markets. He outlined that the Bank needs to feel its way as the Official Cash Rate (OCR) approaches neutral, which the RBNZ estimates to be in a 2.5%-3.5% range. He said ‘the way is open for some further easing’ which aligns with smaller incremental cuts after an expected 50bp reduction in the OCR in February.

After opening little changed, NZ swap rates declined in the local session yesterday following the soft Australian CPI data. Rates dipped 2-3bps across the curve with the 2-year closing at 3.46%. The government curve had a modest steepening bias, with 10-year bonds unchanged at 4.54%, as the market looks ahead to upcoming supply.

There will be NZ$500 million of NZ government bonds offered in the weekly tender today across the May-31 ($200m), May-36 ($200m) and May-41 ($100m) nominal lines. Tender performance has been solid in January, particularly for longer maturities. New Zealand Debt Management announced yesterday that a syndicated tap of the existing May-35 nominal bond will be undertaken in February.

Australian 10-year government bond futures are 3bp higher in yield since the local close yesterday implying modestly higher NZ yields on the open although the market reaction to the FOMC could also be a factor.

Soon after we go to print this morning the Fed is expected to leave rates unchanged which is the first pause since the easing cycle began in September. Steady policy is fully discounted by market pricing and attention will focus on any changes to the statement and Chair Powell’s press conference. There aren’t updated projections at this meeting.

ANZ business confidence and trade data are the only domestic releases of note. Q4 GDP data is scheduled later this evening in both the US and Eurozone. US GDP is on track for another quarter of solid growth. The consensus expects the Eurozone economy to post modest growth for the quarter. The European Central Bank is unanimously expected to cut rates by a further 25bp taking the deposit rate to 2.75%.