By Doug Steel
The Fed minutes didn’t offer anything new. Officials repeated support for gradual interest rate hikes. The committee is divided on when to start reducing the balance sheet, disappointing those looking for more guidance. A September start remains possible. There was little change in Fed pricing after the minutes with about a 60% chance of another hike in 2017. Focus now turns to the Fed’s Monetary Policy Report to Congress due on Friday ahead of Chair Yellen’s semi-annual testimony beginning on July 12.
The only other news of note was that the EU and Japan reached political agreement at a ministerial level on a trade deal that has been in the works since 2013. Leaders are expected to endorse the preliminary accord at a summit this week. There was no market reaction but it is another sign that some global trade deals are advancing despite heightened fears of protectionism and trade wars. Improving global trade has been one factor behind some global central banks adopting a more upbeat tone of late including the ECB, BoC and even the BoE, despite obvious risks remaining.
Resuming after the Independence Day holiday, and after an attempt to push a bit higher post the Fed minutes, US 10-year Treasury yields have settled down around 2 bps for the day to sit at about 2.33%.
NZ swap yields unwound a bit more of their recent run higher yesterday, following the previous day’s RBA on-hold decision and unchanged neutral guidance. NZ 2-year swap yields closed down around 3 bps near 2.31% and 5-year swap yields lost 4 bps closing at 2.86%. The market continues to price a first full 25 bp hike by the RBNZ by May 2018. That aligns with our forecast.
There is plenty on the calendar over the next couple of days to generate some market movement. This includes the ECB account of the monetary policy meeting and some ECB speakers, along with the US ISM non-manufacturing survey and ADP employment figures overnight as a pre-cursor to the main data event, Friday’s US payrolls. That is on top of the Fed’s Monetary Policy Report due to Congress as mentioned above.
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Doug Steel is a senior economist at BNZ Markets. All its research is available here.
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