Fed FOMC members began their usual post-meeting prognostications in a series of speeches that kicks up another gear this week. George was her usually hawkish self in proclaiming that she felt recent weak inflation was no reason for the Fed to back away from a continued gradual pace of rate increases and “…we do have to keep moving”. Williams noted he was in a one more hike this year and 3 next year camp and picked a “new normal” Fed Funds rate of 2.5%. Kaplan said that he remains “open-minded” on a December rate increase but remains concerned current weak inflation may be the result of hard-to-counter structural trends.
None of these speakers had an impact on the market. The greater force on US 10-year yields was the risk-off mode after North Korean headlines during NZ trading hours. The 10-year rate fell from 2.28% to 2.25% and hovered around that level during the overnight session. This price action flowed through into the local rates market, which saw the 2-year swap rate close down 3bps to 2.23% and the 10-year rate down 5bps to 3.24%. These falls also reflected some catch-up to Australian rate futures in the previous night’s session, after RBA Lowe’s hosing down of rate hike expectations in his late-Thursday speech.
The prospect of NZ First holding the balance of power in any coalition government suggests a likely easier fiscal policy track and higher government debt levels relative to National or Labour’s pre-election projections. It’s too early to jump to conclusions but in a reasonably fully employed economy, that adds to inflationary pressure and an earlier RBNZ tightening than the Bank has previously indicated (late 2019), but the market has priced this outlook anyway. So overall, we see little implication for the market from the election result, relative to expectations.