Markets drift in US and Europe as traders lose conviction in the Fed-hike trade. Lack of inflation smoking gun has them wary

By Jason Wong

On a day with little economic data released, in a week of few major releases, and with no high-impact Trump tweets what do you expect?

Exactly. There is little to report. The USD continues to retreat, a familiar theme this year. It has fallen against all the majors, although modestly.

Equity markets are flat to the point where you wonder if they're open, while there appears to be more action in the bond market, with yields lower across the board.

The European political risk trade, which we got a taste of earlier in the week, hasn't been in play today, or yesterday. Euro-area 10-year yields are all lower, led by the periphery and current political hotspot, France. Falls of 10+bps have been recorded for France, Portugal and Italy, while German bunds are down 6 bps to 0.29%. UK rates are down 8 bps while, with this backdrop, US rates have shown a steady decline from last night, from a high of 2.40% down to 2.32% at present, some 5-6 bps lower from levels prevailing at the NZ close.

US short end rates are drifting lower as well, as traders lose conviction in the Fed-hike trade, with no smoking gun in recent inflation data to encourage the Fed to hike next month. March OIS is priced at 7 bps, or about a 28% chance of a hike.

It's going to take a strong rebound in wage inflation in next month’s employment report or some convincing language from Fed Chair Yellen's testimony next week to shift market expectations for a March hike from here.

The pricing of hikes for the full year has been drifting as well, with now only 47 bps priced by the December meeting.

The lower global bond yield dynamic continues to support the yen, as US-Japan rates compress.

Jason Wong is on the BNZ Research team. All its research is available here.