US Fed's Fischer sets less hawkish tone. RBNZ's McDermott says RBNZ will take its time. Only unexpected data likely to move market positioning

By Jason Wong

The US 10-year Treasury rate is up 1 bp to 1.57%.  They were a couple of bps higher than that earlier in the session as the market anticipated a Bloomberg TV interview with Fed vice-chair Fischer. 

As it turned out, Fischer wasn’t as hawkish as feared.  He didn’t give any timeline on future rate hikes and his message was that incoming data will determine the trajectory of rate increases: “…we can choose the pace, but we choose the pace on the basis of data that’s coming in”.

The market is gradually losing interest in pricing in the chance of a hike as soon as September, and at 34% is more or less back to pre-Jackson Hole levels. 

Friday night’s US employment remains a key release and it will take a positive surprise to get the market to price in more chance of a tightening as soon as September.  The smart money still favours a delay until December, where a 69% chance has been priced in.

The local rates market has exhibited lower volatility compared to US rates over the last couple of sessions – muted rises in yield on Monday and muted falls in yield on Tuesday.  We saw a flattening of the swap curve, with the 2 year rate flat at 1.975% and the 10-year rate down 4bps to 2.38%.

The OIS market continues to lose interest in pricing in a possible rate cut in September by the RBNZ, perhaps due to the weaker NZD/stronger USD dynamic that has been in play this week.  Just 3.5 bps of easing is now priced in for that meeting.  Assistant RBNZ Governor McDermott gave an interview on National Radio, but that had little market impact.  The messaging was similar to the last MPS, which indicated a bias to ease further, but no hurry to do so.  When asked if the RBNZ would do “whatever it takes” to meet its inflation target, McDermott’s response was “…we’ll do what is appropriate and we’ll take the time that’s required”.

Today’s ANZ business outlook survey is the key local data release this week.  The economic activity indicators should remain robust and more interest lies in the inflation expectations component, given that’s the RBNZ’s focus.  The year-ahead inflation expectations measure has been stable at 1.4-1.5% all year.  It would probably take a fall to 1.3% or below for the market to reassess the chance of a September easing.