The US rates market has been treading water ahead of the FOMC announcement, with the 10-year rate trading in a tight 2 bps range of 2.20-2.22%.
The local rates market barely showed any yield movement yesterday either.
The market is positioned for a “dovish hike” by the Fed so we think the balance of risk post the meeting is for upside to US rates and the USD.
Changing personnel will mean interpreting the dot plot of rate hikes ahead will be hazardous. The removal of known dove Powell could serve to lift the median expectation of rate hikes for next year without anyone else changing their view.
Overall, with unemployment rate significantly surprising to the downside over the past quarter, we don’t see the Fed deviating much from their previous message of cautiously raising rates in the years ahead. Recent weakness in inflation should be acknowledged, but seen as transitory.
After tomorrow’s widely anticipated rate hike is delivered, current market expectations see only 1½ more hikes through to the end of next year compared to the March FOMC median of 4 more hikes by end-2018.
The market will also be paying attention to any comments on balance sheet normalisation, which is likely to get underway this year, the only question being how soon? Overall, it feels that the market is currently under-pricing the chance of higher rates.
The economic calendar picks up a gear, with some focus on China’s data dump today and US CPI and retail sales data ahead of the key FOMC announcement at 6am tomorrowmorning.
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Jason Wong is on the BNZ Research team. All its research is available here.
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