Summary
Fed hikes 50 basis points, QT (quantitative tightening) to start 1 June, Powell suggests 50bps hikes over the next couple of meetings
• Market reacts to Fed Chairman Jerome Powell ruling out 75bps hike increments; US 2-year rate down significantly, curve steepens
• Broad based fall in USD; NZD up through 0.65 but underperforms AUD; cross near 0.90
• Oil prices up 5% on increased chance of EU banning Russian oil
• NZ rates up to fresh highs, driven up by higher Australian yields
Good Morning
There was no surprise in the Fed’s 50bps hike, plans for further hikes, or plans for quantitative tightening but the market has reacted to Chair Powell’s comment that seemed to rule out hike steps of 75bps. The US yield curve has steepened on that, with a large fall in the 2-year rate, while the 10-year rate is down 6bps to 2.91%. The USD has broadly weakened, seeing the NZD back up through 0.65. AUD outperformance has seen NZD/AUD almost break below 0.90.
As widely expected, the FOMC raised it policy rate by 50bps taking the target range for the Fed Funds rate to 0.75% to 1% and repeated the line that ongoing increases in the target range will be appropriate. The news was the timing of the beginning of quantitative tightening, with 1 June chosen as the date for reducing the size of the balance sheet. For Treasuries, the cap would be set at $30b per month, rising to $60b per month after three months. For agency debt and MBSs, the cap would begin at $17.5b per month, before lifting to $35b. The aggregate $95b per month cap metric was in line with previous guidance.
The statement acknowledged the fall in GDP in Q1 but noted household spending and business investment remained strong. The war in Ukraine was seen as creating additional upward pressure on inflation and likely to weigh on economic activity. It also noted that the COVID-related lockdowns in China were likely to exacerbate supply chain disruptions. In a hawkish comment, the statement said “the committee is highly attentive to inflation risks”.
Chair Powell’s press conference opened with some hawkish comments. He said that inflation is much too high, underlying momentum in the economy remains strong and labour demand is very strong. He said that the FOMC sees 50bps hikes on the table for the next couple of meetings.
The messaging reinforced market expectations that the Fed would front-load the tightening cycle with 50bps hikes. The market has priced a series of 50bps hikes over coming meetings. The market has entertained some chance of an even larger 75bps move, but Powell said that 75bps isn’t something the FOMC is actively considering. Rates fell significantly after that comment. As we go to print, the 2-year rate is down 12bps for the day and the 10-year rate is down 6bps to 2.91%.
US equity markets were choppy leading up to the FOMC announcement, moving in and out of positive territory and remained choppy after the announcement. The S&P500 shows gains of over 1½% as we go to print.
Powell’s ruling out of 75bps hikes has seen the USD weaken across the board, with the BBDXY index showing a chunky fall of 0.8% for the day. The NZD has broken up through the 0.65 mark, the AUD is up through 0.72 and EUR is up through 1.06. The AUD has outperformed in the afterglow of Tuesday’s hawkish RBA policy update which has since seen the 3-year bond rate rise by some 22bps as the market prices in a more aggressive, front-loaded tightening cycle. On AUD outperformance, NZD/AUD has traded as low as 0.9002.
In other news, the EU plans to ban Russian crude oil over the next six months, refined fuels by the end of the year and bar European ships from transporting Russian petroleum products. Sources suggest that Hungary and Slovakia, who are more reliant on Russian oil, will be granted a longer timeframe, through to the end of next year. All 27 EU members will need to agree for the plan to progress. If agreed, the question then becomes what will Russia’s response be, and a cut in the EU gas supply would be highly problematic for the region next winter. Oil prices are up about 5%, as the market digested the increasing chance of the EU oil ban.
In key data overnight, the US services ISM index fell 1.2pts to 57.1 in April against expectations for a small lift. Like the manufacturing version released earlier this week, supply chain issues and inflationary pressures remained intense. The employment index fell 4.5pts to 49.5, as much a reflection of the difficulty in finding staff than weaker labour demand. Separately, the change in ADP private payrolls for Apr was weaker than expected at 247k, but that shouldn’t change expectations for nonfarm payrolls at the end of the week, given its recent patchy track record of predicting that figure.
NZ labour market were not surprising, continuing to highlight a very tight labour market, with the unemployment rate steady at 3.2% and annual wage inflation continuing to push higher, at 5.3% y/y for QES private sector average hourly earnings and 3.1% y/y for the private sector labour cost index – the latter too high for comfort for a central bank that would rather see it closer to 2%. The data reinforced expectations for a rapid move higher in the OCR, with the next hike in three weeks likely to be another 50bps increment.
The domestic rates market saw a strong lift in yields, given the force of much higher Australian rates that followed the hawkish RBA policy update. At the risk of sounding like a broken record, rates lifted to fresh multi-year highs. The 10-year NZGB rose 10bps to 3.81%, outperforming the swaps market, which saw a 15bps lift in the 10-year rate to 4.13%. Short end rates were also affected, with the 2-year swap rate up 13bps to 4.0%. The terminal OCR priced has risen to about 4.25%, which we think embodies a significant risk premium in a heavy one-sided market than representing market expectations of where the OCR will ultimately settle.
The key event in the day ahead is the Bank of England’s policy update, with almost economists picking a 25bps hike in Bank Rate to 1.0%. More interest will lie in the policy guidance, given that previous guidance was softened to further hikes “might” be needed, even though headline inflation is on the verge of breaking 9 or 10% on a surge in household energy costs. Some on MPS worry that the cost of living crisis could drive the economy into recession, and the case for further rate hikes need to be judged in that context.
Events Round-Up
NZ: Unemployment rate (%), Q1: 3.2 vs. 3.2 exp.
NZ: Employment change (q/q%), Q1: 0.1 vs. 0.1 exp.
NZ: QES avg hrly earnings (q/q%), Q1: 1.9 vs. 1.2 exp.
NZ: LCI pvt wages ex o-time (q/q%), Q1: 0.7 vs. 0.7 exp.
AU: Retail sales (m/m%), Mar: 1.6 vs. 0.5 exp.
AU: Home loans value (m/m%), Mar: 1.6 vs. -1.9 exp.
US: ADP employment change, Apr: 247 vs. 385 exp.
US: Trade balance ($b), Mar: 109.8 vs. -107.1 exp.
US: ISM services index, Apr: 57.1 vs. 58.5 exp.
US: FOMC Fed Funds (upper%), May: 1.0 vs. 1.0 exp.
*Jason Wong is Senior Markets Strategist at BNZ. BNZ's full Markets Today report is here.
David Chaston is away on holiday.
117 Comments
The US economy will also have to find a way to function with significantly more women out of work and not earning if they want to go down that route.
Not that they will offer them any meaningful support, mind you. They generally don't care about anything immediately after birth through to the point that they're old enough to join the military or vote republican.
And guess where we might be heading...
Where I come from, however, we would call Luxon’s answer “Jesuitical” – meaning “practicing casuistry or equivocation; using subtle or oversubtle reasoning; crafty; sly; intriguing”. Why? Well just think about Luxon’s answer for a moment or two. Five years ago, Luxon’s political career was just a gleam in Prime Minister John Key’s eye. He was still at the helm of Air NZ, still earning more than $4 million per annum, and, almost certainly, still a key participant in the Fellowship of the Upper Room.
Why not admit frankly to his membership of the Upper Room? What is it about this Fellowship that prompts Luxon and his advisers to make as little of it as possible? The answer lies in the information unearthed by the sort of journalists who know where to go looking on the Internet for linkages between evangelical Christian fellowships and ambitious right-wing politicians. What those searches revealed was an Upper Room pastor of decidedly Trumpian sympathies, whose political views appeared to match those of the American Christian Right. Unsurprisingly, Luxon has done his utmost to put these “interesting” associations as far behind him as possible.
Another sign:
https://www.nzherald.co.nz/business/matthew-hooton-christopher-luxon-is…
excerpt:
If Key and Ardern still leave people wondering exactly why they wanted to be prime minister, Luxon risks sounding even more empty. Most alarmingly, that may even be true.
After all, this is someone who agreed with an interviewer that abortion is murder but promised not to do anything to stop those "murders" should he get into a position to do so. Even those of us who completely disagree with him on abortion were left asking what confidence we can have that he would be prepared to risk re-election by exercising his powers to do anything at all if his pollsters advised it wasn't safe.
I’m not religious or a red neck. I have three kids, and due to complications that I won’t get into, we had 4D scans for each pregnancy.
If you get an abortion you’re a stone cold killer. I still think they should be legal, not everything good is legal and not everything bad is illegal.
Rational mind, pah, you’re pathological. Next thing you’ll be pushing eugenics.
It really doesn't matter Jonny. The problem is when religion and/or politics is driving the thinking. I'm neither pro abortion nor against it. I believe people need to be responsible for the consequences of their choices, so abortion as a means of contraception is I suggest offensive and lazy, but there are other reasons that indicate it is fully justified such as rape, or medical. Plus being a little hard nosed, with the population problems we have on the planet it would behove us to perhaps not be too quick to intervene to save some. Very difficult choices for the professionals and parents, but there are some hard consequences coming our way for all our excesses and the price of those will be high.
Stop abortion at the source. Vasectomies are reversible.
Make every young man have one. When he's deemed financially and emotionally fit to be a father it will be reversed.
What's that? Did the idea of regulating a man's body make you uncomfortable?
Then mind your own fxxxing business.
***Not been able to track down who penned this originally
Despite all the wokeness out there I think you'll find it's still blokes getting ladies pregnant, so yes blokes should have say in abortion issues.
Also the whole point of a comments section is for people to share different points of view. I would expect financial site users to be heavily skewed to males.
I mean how dare a man have an opinion on topics such as abortion. They've had their say long enough in this tyrannical system of patriarchy, you should crawl back into your stale pale male corporate ivory tower and leave the women to have their say on issues that matter to them.
Sure. But something the blokes who share their opinion might want to take into account is that they are missing quite an important piece of the puzzle. Not only are they just never going to be affected by this in the same way women are, they can also have no understanding of what it feels like to be pregnant when you don't want to be, or to think you might be pregnant when you don't want to be. It's a bit like people with children offering an opinion on child rearing. Sure, you can have an opinion - but you'd better be hunble about the fact that you are missing a crucial piece of understanding - understanding what it is like to have a kid.
Most likely I'll never feel what it's like to be murdered, or to be given the death penalty, but I can still have an opinion on it. I don't think abortion is a gendered issue, nor do I think the death penalty is (most death penalty recipients in the US for example are men)
Either the foetus is her body, or it's not. If it is, then it is her choice. If it is not, then it is either no-one's body or someone else's body. If it's no-ones body, then there's no issue with abortion. If it's someone else's body, then making her continue with a pregnancy that she does not want prevents a woman from accessing a medical procedure that would reduce her chances of early mortality (as maternal death rates are significantly higher than death rates from abortion complications) in order to protect the body of someone else. I can't think of a single other case in which we would legally deny someone access to medical care that significantly reduces their chances of early mortality for the sake of someone else.
Say you live in Houston, Texas. The closest place you will be able to get an abortion if Roe is overturned is New Mexico - that's a 19 hour bus ride, which costs about 150 dollars. You then need to spend at least 4 to 6 hours at the clinic, pay 100 to 600 or so for the abortion depending on type., then take another bus ride home. So best case scenario, it is a 3 day trip, requiring at least 400 usd, and that is not even taking into account accommodation costs, the possible follow up appointment, arranging that time off work, possibly needing to organize childcare for other children. So, 'just a bus ride away' is a pretty big understatement.
... every sperm is sacred ... every sperm is great ... if a sperm is wasted , God gets quite irate !
Let the heathens spill theirs' ... upon the dusty ground ... God will make them pay for each sperm that can't be found ....
... ( hey Mr P ... you haven't got a magnifying glass I can borrow , by any chance ? .... just asking ... ummmm.... for a friend ... yes ! ... ) ....
A return to a puritan past with all the evils that come with it?
A comment on CNN yesterday suggested it will almost guarantee the Democrats get to control both houses. Apparently mid terms are coming up. Have the Republican Justices shot themselves in the foot? Wait and see.
On the plus side, Economists get to test the link between legalised abortion and crime rates in the other direction now. Republican states to suffer from higher crime rates in a couple of decades?
https://en.wikipedia.org/wiki/Legalized_abortion_and_crime_effect#:~:te….
Roe v Wade is fascinating, is this not a technical ruling that hands the legislature back to the State, it doesn't necessarly mean abortion is illegal? I mean, if you don't want to live in a repressive State then I guess you have to move to one that isn't?
Then there is the humantarian side, anti-abortionists appear not to care nearly as much for the child once it's born, their passion ebbs rapidly for the millions of babies living below the poverty line.
https://www.goodreads.com/book/show/319810.Overshoot
We've known for decades, that there are too many humans on the planet.
Mind you - contraception is better than after the horse has bolted.
China was as onto it as any government ever has been, with the one-child policy. Note the avoiding arrogance of the western media re than move.
PDK, many of your posts involve, either directly or indirectly, a reference to demographics. May I be so bold as to ask just what your education in or practical involvement with the subject is ? Similarly, I ask the same in relation to physics because with yourself and others often responding to statements by others on this list that do not reconcile with or even oppose yours, the retort is very often "its in the physics".
Jus saying is all.
Enough study of the Limits to Growth (first read that tome in 1975), energy (first read a Hubbert-written chapter in 1976), population (first read Catton's Overshoot in 1984-5, attended a lecture of his in 2006 or 7), 15 years of attending energy (and related) lectures - giving one or two, too. Read more about the combined predicament than anyone I know.
The problem with narrative-reconciliation, is usually whether one is based on false assumptions. Those based on infinite growth in physical consumption, on a finite planet, by an unlimited populace - were based on a false assumption. Or more accurately; collection thereof. Simple, really.
People who pursue this line of un-vested inquiry, end up in pretty much the same space.
I think you're right, this is just handing power back to the states to decide. I can see how Republicans would celebrate a roll-back of the tyranny of the Federal Government.
It means abortion will be legal in some states and suddenly illegal in others, which will make for a fantastic natural experiment in due time. People are free to move to other states in theory, but I suspect the average abortion consumer is often not in a situation to easily move and setup a new life in a new state.
To be clear, I am pro-abortion and think they should be readily available to anyone who wants them to reduce the number of unwanted children and all the problems that ensue, but I certainly understand the opposing point of view. I think reasonable people can have different views on this topic.
That's my interpretation, for example Australia's abortion law is at a State level, not Federal. This is a consitutional issue, not an abortion issue.
That repressive Republican States will use this opportunity to make abortion illegal is a separate issue. No more crazy than being able to go shopping with an AR 15 in my opinion. There is a craziness at the heart of the US, as much as I love Ca and NYC.
https://www.nzherald.co.nz/business/larger-house-price-falls-remain-pos…
Even now, blaming everyone in the world but himself for the situation. We are in this situatio because of manipulated theory of TRANSITORY INFLATION and continuation of emergency measures of printing and throwing cheap and easy money, when in reality as early as December 2020 ( Just nine months after pandemic measures) it was crystal clear that it is time to pull back but Alas !
Immitating big brother Fed without realising the size and how diversify n different US economy is.
In that context, we are entirely the same as the US - a draw-down economy, so temporary. Looks like others are thinking it through:
https://www.rnz.co.nz/national/programmes/ninetonoon/audio/2018840394/b…
We're quite different - we're arguably worse once you take in our massive reliance on China and being at the mercy of global logistics (and all associated emissions etc). Acting like we are a price-maker and not a price-taker is a recipe for missing the inflationary component of imported trade and why we needed to act far more decisively than we did.
Yup.. Wonder what the upper limit is the NZ govt is willing to pay on its long term debt before it starts interfering in the bond market again? 5%?? Maybe the MMT crowd will get what they want and NZ will be forced to monetize its debt? Seams like our two options are have a serious recession or go down the debt monetization/financial repression road..... Robert Frost's - the road not taken sort of comes to mind. Will we go down the serious recession road or will we opt for debt monetization....
And Lo! The Hunter of the East has caught
The specuvestor's loan in a noose so tight.
Dreaming while Dawn's left hand was in the sky
I heard a voice within the Harcourts cry
Awake my little ones, and list your rental
Before all liquidity in the market runs dry.
(Apologies to the original Edward FitzGerald)
As RBNZ is forced to raise interest ate and now not wanting to raise by another 0.5%, which they too know is must, so are under pressure and having sleepless nights.
Are they trying to build sentiments through media by creating fear to build a case for going slow on interest rate : https://www.nzherald.co.nz/business/what-a-30pc-house-price-fall-would-…
Our Nero fiddle while house price were burning......Will he repeat himself by not acting in favour of real estate lobby.
unlikely ashley church the guru of property disagrees and says it is only a blip
So what does this mean? Are house prices about to take off again? Well, no – probably not. In fact, in some regions, the increases may have been inflated by a smaller number of sales or a large significant transaction – but the point is that the market isn’t “crashing” despite what you might be seeing or hearing.
Even the observation that the 2% quarter drop in Auckland is the biggest quarterly drop in our Queen City since the GFC 14 years ago says more about the fact that the impact of the GFC was also dramatically overblown by many commentators and that the Auckland housing market has been remarkably benign for the best part of 40 years.
So, despite the colourful language in the OneRoof report – the Auckland market isn’t “reeling” from this drop, there isn’t widespread “pain” across the city, and very few vendors are “suffering”
Powell’s ruling out of 75bps hikes has seen the USD weaken across the board, with the BBDXY index showing a chunky fall of 0.8% for the day.
Collateral Shortage…From *A* Fed Perspective
What Really ‘Raises’ The Rising ‘Dollar’
..why is the 4-week Treasury bill sitting there on May 2 yielding only 41 bps? While that’s finally above the current RRP, you’ll note that beginning tomorrow the FOMC will meet and by Wednesday almost certainly announce that is has raised the RRP by 50 bps.
And even if policymakers do chicken out again, it will be a guaranteed twenty-five.
In other words, the RRP by Thursday has to be 55 bps minimum, though far more likely 80 bps. Yet, the 4-week bill (and the 8-week) isn’t anywhere close to either of those when by every investment return consideration it should already be above the latter.
Wouldn’t you know it, too, that from late May 2008 all the way into that second phase of Euro$ #1, T-bill rates began to drop has they had leading up to Bear Stearns. These did not go unnoticed by policymakers; they were, obviously, totally unappreciated though not in the financial system itself.
In other news, the EU plans to ban Russian crude oil over the next six months, refined fuels by the end of the year and bar European ships from transporting Russian petroleum products.
Poland receives Russian gas by reverse — Gazprom
MOSCOW, May 4. /TASS/. Poland was receiving Russian gas by physical reverse from Germany after termination of direct supplies and is now receiving gas by virtual reverse from nominations of Italian and French consumers, official spokesman of the Russian gas holding Sergey Kupriyanov said.
The Yen rate is just made-up at this point, I've given up trying to follow it. There's no reason for us to be as low as we are compared to it, given the state of the Japanese economy. Unfortunately given it's where we source most of our second-hand cars and EVs, it's actually becoming a bit of a problem. Other more bouyant currencies are now able to pick up those cars for less, so we have to dig deeper to get out of the cycle of paying even more for fuel due to a lower NZD.
It really is a form of poverty trap, except at a national level.
It feels 'strong' but it isn't. It's been as high as 87 recently, the ten-year high is in the 90s.
Meanwhile the USD/JPY rate touched 130 recently. So while it might seem we're high compared other currencies at today's rate, historically speaking our rate should be much much higher than the mid-80s, given our relative economic performance over the last fifteen years. If anything, we seem to be overdue for a major correction downwards.
I feel like when you get close to parity against the AUD then the Yen should really be a small speck in your rear-view mirror. But apparently it isn't like that.
Who knows at this point. Like I say, it's so divorced from the fundamentals that I don't even bother anymore.
it depends on your fundamentals surely? If Japan operate at basically 0% inflation over the long-term, carry out continuous yield curve control to fix rates where they want them, and are a net exporter of higher value products (almost all the time), their currency settles into being determined by relative pricing of labour, services, materials etc (like the good old days before currency and bond trading distorted everything).
Yup. We're going to find out how little a bank stress test counts when you throw in the all the stress tests from our distributors and ticket clippers in our domestic economy, as well as the mental effect of owning a house that is rapidly worth less and less with each passing day. RBNZ thinks banks can withstand 40% property value drops and 12% unemployment, but can New Zealanders?
I remember growing up in the early 90s in NZ. It was a gloomy dreary place where everything shut at 2pm on Saturdays. If you think we have a mental health crisis now, then buckle up.
Our Chinese masters will be pleased & appeased that the Christchurch City Council refuses to allow Sumner residents to place a flagpole atop the new civic centre ...
... although the original building sported a pole & flags for decades ... it has been decided not to trust residents , who may offend our international connections by flying inappropriate flags ... ( Taiwan ... Tibet ... ??? ) ...
Just a link for those who believe that being a company CEO atomically means a higher level of thinking and competence and could even run the country better.
https://www.stuff.co.nz/business/industries/128542827/company-ceo-criti…
... if we can distance ourselves from his appallingly misogynistic comments ... and it's not easy ... that was a brain fade of epic proportions...
But ... when the rubber hits the road as a shareholder , his company DGL , has quadrupled in share price since quietly listing ...
... her MFB listed to great fanfare at a similar time , and since then the SP has halved ..... infact , 88 % of the funds raised at the MFB launch went to directors , they sold out .... left ... took My Money Bag and scarpered ... only 12 % of the IPO money went back into the company to repay debt & to grow the business ...
This - he had a serious point to make - that MFB didn't have good fundamentals and was basically the founders profit taking on the backs of the suckers who bought into it - and made it in the most appalling way possible.
To misquote Bomber Bradbury -he could have eaten a live kitten on air and it wouldn't have been worse
On the day the Fed announced a 50 bps interest hike, the stock markets had a big party. On the next day, a hangover. It soon became a plunge into a sea of red. US FANG lost over 6 %, and equal to interest on a term deposit of two years.
Can't see how asset managers grow Kiwisaver funds.
And how is it possible that sophisticated bots can't keep the wild swings in check.
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