In the wake of the Fed’s policy update yesterday, US Treasuries are well supported, with the market comforted by Chair Powell seeing the impact on inflation of higher tariffs as “transitory”. We thought Powell might have avoided that word, given the Fed’s view of inflation being transitory during the COVID episode proved to be wrong, but the market seems to be buying into the narrative.
The rally in Treasuries extended further overnight, taking the 10-year rate down to as low as 4.17% before reversing course. It currently sits at 4.24%, little changed from yesterday’s close, as is the case for yields across the curve. The market prices the next 25bps cut fully by the July meeting and with 68bps of cuts for the year, a view that the Fed will be more attune to weaker growth than rising inflation this year.
After a soft open, the US equity market extended their post-Fed rally in early trading but the S&P500 has since slipped back into negative territory, down modestly as we head to print.
US existing home sales were much stronger than expected, rising 4.2% against an expected 3.2% fall, although it was mainly a case of reversing much of the previous month’s fall. Initial jobless claims rose 2k to 223k last week, close to expectations, supporting the narrative of a still-resilient labour market.
As expected, the Bank of England left policy unchanged in a 8-1 vote, with perennial dove Dhingra voting for a 25bps cut and Mann falling back into the pack after voting for a larger 50bps cut at the previous meeting. The MPC left guidance unchanged at “a gradual and careful approach to the further withdrawal of monetary restraint is appropriate”. Governor Bailey noted “we still think that interest rates are on a gradually declining path” and “we are certainly now in a world of even greater uncertainty…we’re still waiting to see what really does happen, because this is frankly a fairly fast-moving story”.
The market pared the extent of further easing priced into the curve, with less than two full cuts priced this year, at 47bps, compared to 53bps priced at yesterday’s close.
Ahead of the BoE meeting, UK labour market data were in line with expectations, showing still-strong wages growth – with private sector weekly earnings running at 6.1% yoy – and a steady unemployment rate of 4.4%. Despite modestly higher rates across the Gilts curve, the impact on GBP has been minimal, in the face of a broadly stronger USD, with GBP down modestly to 1.2960.
The NZD and AUD have clearly underperformed. The NZD found some overnight support near 0.5725 and currently sits around 0.5750. The AUD has fallen back below 0.63. The moves reverse inexplicable strength earlier in the week. NZD/AUD has fallen to 0.9130. The market twice attempted to push the cross rate higher yesterday, in the wake of, firstly, stronger than expected NZ GDP and, secondly, weaker than expected Australian employment, but in both cases, the moves up through 0.9160 quickly reversed.
NZ GDP data for Q4 showed a 0.7% q/q bounce-back, following back-to-back contractions of 1.1% over the previous two quarters. The figures need to be treated with caution, given the recent difficulty in seasonal adjustment. Market reaction was rightly fleeting in the rates and currency market, given the volatility in the data. Here we are one quarter later and the vibe is one of a cautious recovery in activity than solid growth.
Australian employment fell 53k in February following the 31k lift in January, but similar volatility in the participation rate left the unemployment rate steady at 4.1%, consistent with still-tight labour market conditions.
The NZD is weaker on all the other key crosses. NZD/JPY is down over 1% from this time yesterday to 85.5, NZD/GBP is down to 0.4435 and NZD/EUR has fallen back to 0.53. Speaking to lawmakers, ECB President Lagarde said an increase in US tariffs of 25 percentage points would lower euro area GDP growth by 0.3pps in the first year and should the EU retaliate, growth would be reduced by half a percentage point, while inflation would rise by the same proportion. She added that the inflationary effect would ease, due to lower activity dampening inflationary pressures.
In the domestic rates market, there was very strong demand at the weekly bond tender, with some likely short covering from those who were expecting an early syndication of the tap of 2032 bonds. Bid to cover ratios were above 4 across all the lines offered and all were priced at 2½-3bps below pre-tender mids. NZGB yields closed the day down 4-6bps across the curve, compared to 2-4bps falls across the swaps curve.
On the economic calendar ahead, NZ trade data are released followed by Japan CPI data today, with only second-tier data released tonight.
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