The Fed's Powell and Mester play their roles, seeing 'great progress' and 'upside risks'. Market eyes on US CPI with consensus variance the trigger for reaction

By Jason Wong

US 10-year yields have traded in a 2.82-2.86% range, fairly tight in the context of recent market volatility.

There has been some curve flattening, with the 2-year rate up 2 bps to 2.10% and the 10-year rate down nearly 2 bps to 2.84%.

The Fed’s Mester, a voter this year and known hawk, said that the recent stock market turmoil hadn’t affected her economic outlook. She guided towards a path of three more rate hikes this year and next year, a similar pace to last year.  In talking about the risks to the US economy she noted that “I think that there’s more salient upside risks to the forecast than we’ve seen in quite a while”.

New Fed Chairman Powell played with a straight bat at his swearing-in ceremony indicating that the Fed had made “great progress” in moving towards its dual mandate and that the Fed will “remain alert to any developing risks to financial stability”.

In an uneventful session, NZ rates were down 1-2bps across the curve. 

There are a number of top-tier economic releases ahead, including GDP for Japan, Germany and the Euro-area.  The key release though is the US core CPI.  The market expects a 0.2% m/m increase for January, lowering the annual change slightly to 1.7% y/y.

Given the market’s growing anxiety about the prospect for higher US wage and price inflation, the release will probably generate a significant market reaction if it is different from the consensus. Another positive surprise of 0.3% m/m for the month for the core measure could send bond yields higher and equity markets (and the NZD) lower.


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