The shockingly soft US employment report on Friday night triggered a re-rating of Fed hiking expectations, driving lower rates across the curve.
We’ve seen a little of that unwind over the last trading session, although Yellen’s speech has encouraged a mild downside bias to rates as we head into the US close.
US 2-year and 10-year government bond yields are currently 0.80% and 1.73% respectively, down 9 bps and 7 bps from pre- non-farm payroll release levels. Traders put more weight on the poor employment figures than the lower unemployment rate – a new cycle low of 4.7%, albeit driven by falling labour force participation – and wage inflation continuing to run at a decent 2.5 y/y% pace.
The market focus this morning was on Fed Chair Yellen’s and her messaging was pretty much as expected. The key part of the speech was “If incoming data are consistent with labour market conditions strengthening and inflation making progress toward our 2 percent objective, as I expect, further gradual increases in the federal funds rate are likely to be appropriate…However, I will emphasise that monetary policy is not on a preset course”.
The upshot is that a June rate hike is effectively off the table and the market is thinking that unless we get a strong bounce-back in employment, then July is not looking likely either.
OIS pricing has just 1 bp of tightening priced in for June and 6 bps for July (compared to 7 bps and 15 bps pre the employment report). One needs to look to the February 2017 meeting before seeing almost a full rate hike being priced in.
Lower US rates spilled over to into other jurisdictions, with Germany and UK 10-year rates closing at record lows after the employment report and yesterday in Australia we saw the same.
Today, the NZ market will play catch-up to these moves. On Friday, NZ’s 10-year government bond rate closed down 2bps at 2.62%. The record close of 2.56% seen in late May looks to be under threat.
The RBA isn’t expected to ease again this afternoon but the risk is that it adds a mild easing bias to its final paragraph.
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Jason Wong is on the BNZ Research team. All its research is available here.
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