The US Fed left rates on hold as expected. Policy makers continue to signal 50bp of cuts for this year. Plan slower balance sheet runoff. BofJ left rates on a cautious hold. NZ consumer confidence slumps

In the lead up to the US Federal Reserve’s rate decision this morning, US equities advanced while treasury yields and US dollar moved higher, in the absence of first tier economic data. Commodity markets were subdued with gold prices consolidating near record highs above US$3000 per troy ounce and brent crude was stable near US$71 per barrel.

The FOMC left rates on hold for the second consecutive meeting. It kept the upper bound for the Fed Funds Rate at 4.5% which was unanimously expected by economists and in line with market pricing. The Fed outlined plans to slow the pace of balance sheet runoff from next month citing uncertainty around the economic outlook. Although the decision to leave rates on hold was unanimous, Governor Waller preferred to maintain the current pace of balance sheet reduction.

The updated Summary of Economic Projections show policy makers have downgraded growth while increasing their inflation forecasts. The economy is expected to grow 1.7% this year compared with a 2.1% forecast at the December FOMC. Core PCE inflation projections increased to 2.8% from 2.5%. The median FOMC member expects to cut rates by 50bp this year, unchanged from December, though the amount that favoured reducing rates by 25bp increased.

Fed Chair Powell said inflation has made progress but remains above target and that surveys suggest tariffs are impacting inflation expectations. He characterised the labour market as broadly in balance. He repeated previous messaging that the central bank does not need to hurry to adjust its stance with policy well positioned to wait for greater clarity.

US treasury yields were 3-4bp higher across the curve ahead of the decision and moved lower immediately afterwards and the US dollar pulled back off the session highs. The market is pricing around 60bp of easing by the end of the year compared with 55bp earlier in the session. US equities maintained previous gains.

The Bank of Japan kept its policy rate steady which was in line with expectations. Although domestic conditions would support a further tightening in monetary policy, the Bank remains cautious given the escalating trade tensions and potential impact on the global economy. Governor Ueda indicated it is not in a rush to hike rates for now. The market is pricing around 30bp of hikes by the end of the year.

The yen weakened after the BoJ decision with USD/JPY trading above 150 for the first time in two weeks. The US dollar was stronger broadly against G10 currencies in the lead-up to the FOMC. EUR/USD pulled back from the recent high near 1.0950 after the sharp rally since the beginning of the month. The firmer US dollar also weighed on the NZD which traded back below 0.5800 overnight.

NZ consumer confidence fell sharply. The deterioration in the labour market and growing nervousness about the global backdrop are weighing on consumer confidence. Weak confidence and the pullback in the services PMI for February illustrate that the anticipated economic recovery this year will not all be one-way.

NZ swap rates moved lower in the local session yesterday and outperformed on a cross-market basis against Australia. 2-year swap rates fell 5bp to 3.46% with the curve steepening at the margin with the weak consumer confidence data supporting the move.

10-year NZGB yields closed 3bp lower at 4.65%. Australian 10y bond futures are little changed since the local close yesterday, which suggests limited directional bias, for NZ yields on the open.

The weekly government bond tender is scheduled today. NZ Debt Management will offer NZ$500m of nominal bonds across the May-2030 ($250m), May-36 ($200m) and May-2054 ($50m) lines. The market will need to absorb a decent amount of interest rate risk for a second consecutive week. There are no linkers being tendered after consistent issuance over the past month.

The domestic focus today will be Q4 GDP data. After the significant contraction through the middle of last year, the economy is expected to rebound recover modestly in the December quarter. We forecast 0.2% growth in the quarter, trivially below the RBNZ’s 03% projection from the February Monetary Policy Statement.

In Australia, labour market data is released. The unemployment rate is expected to remain unchanged at 4.1%. Labour market data is also released in the UK and the Bank of England are expected to leave rates unchanged at 4.5% with market pricing fully discounting rates being left on hold.