Risk sensitive assets rise investors confident aggressive monetary tightening cycle is ending. The Bank of England left rates steady at 5.25% for the second consecutive month which was in line with expectations

Risk sensitive assets have traded strongly in the aftermath of the FOMC as investors gain confidence that the aggressive monetary tightening cycle is coming to an end. The S&P is up more than 1.5% and is on track for the largest one-day gain since May. Equity indices in Europe and Asia also posted strong gains. Longer dated treasury yields extended lower and the dollar index fell but recovered off the lows. The market now looks ahead to key US labour market data this evening.

The Bank of England is the latest major central bank to leave rates steady. At its monetary policy meeting overnight, the base rate was left unchanged at 5.25% for the second consecutive month which was in line with expectations. The central bank expects that policy settings will need to remain at restrictive levels for an extended period of time. The monetary policy committee vote was split 6-3 with the minority favouring a further 25bp increase. Governor Bailey said that the bank is ‘watching to see if more rates hikes are needed’ and that it is much too early to be thinking about rate cuts.

Market pricing for the BoE base rate was little changed following the policy decision. There is about 7bp of tightening priced by February next year. The pound made modest gains against the euro in the immediate aftermath of the rates decision before retracing.

US initial jobless claims rose to 217k, a seven-week high. Continuing claims, a proxy for people receiving unemployment benefits, increased to the highest level since April. Both point to some evidence of a cooling labour market albeit from levels associated with a resilient US economy.

Japan’s prime minister Kishida announced a stimulus package to reduce the impact of high living costs on households, help firms raise wages and offer also support for domestic investment and growth. The measures total more than 17 trillion yen (US$113 billion) and will be funded by a supplementary budget for the remainder of the fiscal year to March 2024.

A Reuters article citing government sources that directly interact with the central bank indicated the Bank of Japan Governor Ueda will continue to dismantle the ultra-easy monetary policy settings. This follows the decision earlier this week to pullback from 1% being a rigid topside limit for 10-year JGBs as part of the yield curve control framework. The Yen was little changed on the news report while 10-year JGBs yields ended the day down 3bps at 0.91%.

US treasuries were mixed leading to a sharp curve flattening adjustment. Long end yields continued to extend the move lower from after the FOMC. 10-year yields reached a low of 4.62% having traded above 4.90% earlier in the week. The front end underperformed with 2-year yields rebounding off the session lows back towards 5%. This contributed to the 2y/10y curve flattening towards -30bp, a 10bps flattening move in the session. 10-year German bund yields fell 5bp to 2.70% while the equivalent maturity Gilt ended at 4.37%, down 12bp on the day.

The dollar weakness following the FOMC extended overnight. The dollar index fell a further 0.5% at the low point before rebounding in line with the reversal higher in front-end treasury yields. The Norwegian Krone underperformed within G10. Although the Norges Bank decision to leave rates unchanged was in line with expectations, there was a more uncertain tone about the potential for a rate hike in December.

NZD/USD traded back above 0.5900 offshore making highs above 0.5915 before retracing in line with the broader US dollar moves. The NZD was largely stable on the major cross rates and NZD/AUD traded marginally higher to 0.9165.

NZ fixed interest markets had a significant move lower in yield in the local session yesterday. There was an initial re-pricing following the moves in US treasuries which then extended after the weekly tender which saw strong demand for bonds. 10-year government bond yields fell 25bps in a largely parallel curve move. Bonds outperformed swaps with 10-year swap spreads widening towards -10bps, well off the recent lows near -20bps.

The weekly government bond tender saw decent demand with NZ$2.0 billion in bids for the NZ$500 million on offer. This is the largest bid volumes in this fiscal year. All 3 lines cleared below the pre-tender mid pricing. Australian bond futures have moved lower in yield since the local close yesterday setting the tone for NZGB yields on the open.

It is a busy end to the week on the economic calendar with the release of US labour market data for October as well as the services sector ISM. Headline payrolls are expected to increase 180k while consensus estimates are for the unemployment rate to be unchanged from September at 3.8%. The services ISM is expected to fall back to
53.0 from 53.6. Services sector PMI data from China is also scheduled.