Fed dot point projections surprise bond markets, with loud echo in local wholesale rates. Markets see RBA turning to hiking in 2018

Fed dot point projections surprise bond markets, with loud echo in local wholesale rates. Markets see RBA turning to hiking in 2018

By Kymberly Martin

There was a harsh rise in global and NZ yields following the US FOMC meeting yesterday morning.

Overnight, US 10-year yields briefly touched 2.64%, before returning to their current level of 2.58%.

The Fed raised its cash rate by 0.25% yesterday, as anticipated by absolutely everyone. However the surprise for the market came from the Fed’s published ‘dot points’. In contrast to the FOMC’s persistent trend of revising these lower, at this meeting the ‘dots’ for 2017 were actually increased.

The FOMC committee’s median forecast now shows three hikes in 2017, rather than two. From 2.45% prior to the meeting, US 10-year yields quickly found themselves at 2.58% yesterday morning.

This influenced the NZ market across the curve. NZ 2-year swap closed up 7 bps, at 2.39%, while 10-year swap closed up 13 bps, at 3.59%. Consistent with these moves the market is now pricing a first RBNZ rate hike by November 2017. We believe it would probably be premature to pull that pricing much further into the year. But for now, global momentum rather than domestic rationale is in the driving seat.

The upward momentum in US long yields continued last evening with yields trading within a smidge of 2.64% in the early hours of this morning. This occurred before a handful of US data releases that were mostly well above expectation. The exception was the core CPI release that stayed at 2.1% y/y, against consensus expectations for a tick-up to 2.2%. This may have contributed to yields fading from their highs to now trade near 2.58%.

The AU rates market was impacted by the double-whammy of the rise in US yields and the deceptively large AU employment print yesterday. This has seen the market reduce pricing of a further RBA cut to around 10% and to price a first RBA hike by mid-2018.

Daily swap rates

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Kymberly Martin is on the BNZ Research team. All its research is available here.

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