The Fed’s policy update brought no surprises and little initial market reaction, but US rates and the USD fell when Powell said a rate hike "unlikely". NZ jobless rate rose to 3-year high, as expected, so little net market reaction

The Fed’s policy update didn’t offer any surprises and there was little initial market reaction, but US rates and the USD fell during Chair Powell’s press conference, where the clear message was one of an easing bias, with a rate hike “unlikely”. As we go to print, US Treasuries are down around 10bps on the day and the NZD is trading at its highs, up towards 0.5940.

The Fed kept policy steady and introduced new language into the Statement.  The opening paragraph noted “In recent months, there has been a lack of further progress toward the Committee’s 2 percent inflation objective.” This was a statement of fact and well aired by recent Fed speakers.  The only other notable change to the description of the economy was “The Committee judges that the risks to achieving its employment and inflation goals have moved toward better balance over the past year”, previously framed as “are moving into”. There was no change to forward guidance, the committee still needing to gain greater confidence that inflation is moving sustainably toward 2% before cutting rates.

The market expected a tapering of its QT programme at this announcement and this was provided, with the Fed reducing the monthly redemption cap on Treasury securities from $60b to $25b beginning next month, leaving unchanged the pace regarding MBS but reinvesting principal repayments in excess of the $35b monthly cap into Treasuries.

Fed Chair Powell’s opening remarks conveyed the easing bias noted in the official statement, with the Fed looking for reasons why it could cut rates, with no mention of the possibility of raising rates.  In response to a question, Powell said it was “unlikely that the next policy rate move will be a hike”, the Fed would need to see “persuasive evidence that the policy stance wasn’t restrictive enough.

Following little initial market reaction, Powell’s dovish comments got the market’s attention as it was prepared for a hawkish update, driving US Treasury yields and the USD lower. As we go to print Powell is still talking, but US 2 and 10-year rates are down close to 10bps, extending a modest fall earlier in the session.  The USD is broadly weaker.  Pre the FOMC meeting the NZD was around 0.59 and it has pushed up to its high for the day towards 0.5940. NZD crosses are modestly stronger, apart from NZD/AUD edging back down towards 0.9080.

Ahead, of the Fed meeting, US economic data releases supported a small fall in Treasury yields. The ISM manufacturing index fell 1.1pts to 49.2 in April, so back into contractionary territory after the previous month’s upside surprise.  Prior to the March reading, the index was below 50 since October 2022. New orders also moved back below 50. The prices paid index rose to a near two-year high of 60.9, raising an inflation warning, although this component is correlated with global commodity prices, which have been heading higher.

The JOLTs survey showed further signs of easing labour market pressures, with the number of job openings down to a three-year low of 8.49m and the quits rate, a good leading indicator of wage inflation, fell to 2.1%, the lowest since August 2020. The survey should help allay concern about the inflation outlook after the stronger than expected employment cost index for Q1 released yesterday. ADP private payrolls rose 192k in April, higher than the 180k expected but, for some time, the data have been a poor predicator of the more important non-farm payrolls figures due at the end of the week.

The US Treasury’s quarterly refunding announcement was in line with the consensus, leaving the issuance of longer-term debt unchanged. Treasury said they didn’t anticipate having to increase sales of regular notes and bonds “for at least the next several quarters”.

Key NZ labour market data were in line with expectations, with the unemployment rate rising to a three-year high of 4.3% and the labour cost index rising by 0.8% q/q, taking the annual increase to an 18-month low of 3.8%.  The message was one of a clear easing in labour market pressures, driving weaker wage inflation. With recessionary economic conditions lingering, the unemployment is well on its way towards rising further, indeed the pace of increase could well pick up, as it stretches towards 5½%, paving the way for further disinflationary pressure.

The data had only a temporary impact on the market, pushing yields and the NZD a little lower on the headline of employment falling by 0.2% and the lower participation rate, but the move wasn’t sustained.  The NZGB and swap curves showed a slight steepening bias.  The 2-year swap rate closed 1bp lower to 5.10% and the 10-year rate rose 2bps to 4.78%. NZGB yields were flat to 3bps higher across the curve, the 10-year rate rose 3bps to 4.92%.

In the day ahead there are only second-tier data released, unlikely to move the market.