NY Fed's Dudley raises expectations of a September US rate hike. Eyes on delayed NZ labour force data which has potential to surprise

By Jason Wong

An upward bias to global rates was evident overnight.  Stronger UK inflation data led the way and rising inflation expectations have contributed to a 5 bps gain in 10-year gilts to 0.58%.

The US rates market responded more to New York Fed President Dudley’s comments in an interview than the softer-than-expected core CPI data.

Dudley commented that it is possible the FOMC could raise rates as soon as next month’s meeting.  “We’re edging closer towards the point in time where it will be appropriate…the market is complacent about the need for gradually snugging up short term interest rates over the next year or so”.  Those dovish comments were offset a little by his comments on the longer term view when he said that the Fed “…don’t have a lot of monetary policy tightenings to actually do over time”, a nod to the view that in the new world the natural real policy rate had probably diminished, along the lines that Williams expressed yesterday.

Atlanta Fed President Lockhart (non-voter) said that at least one increase of the policy rate could be appropriate this year.

The US 10-year Treasury rate is up 2 bps to 1.57%, but that belies the intraday movement.  Throughout the Asian and early European trading session, the bias was for lower rates as William’s essay got some traction and the 10-year rate fell to as low as 1.51%.

Local rates were marginally higher yesterday, with much of the swap curve up about 1 bp.  The 2-year rate closed at 1.95% and the 10-year rate at 2.39%.  There was no local news to drive the market.

Today could be more interesting with the release of HLFS data.  The redesigned HLFS survey, which has already been delayed, has the potential to shock the market.  Was the delay caused by some errant result?  We’ll find out this morning and, conspiracy theories aside, the market expects a nudge up in the unemployment rate.