Fed members who thought that rate cuts were appropriate this year pleasantly surprised the market, seeing the USD weaken and Treasury yields fall; GBP has been the best performer; NZD is fairly flat on the other crosses

Market pricing was range-bound overnight ahead of the FOMC statement this morning.  In the statement, the number of Fed members who thought that rate cuts were appropriate this year pleasantly surprised the market, seeing the USD weaken across the board and Treasury yields fall after the announcement.

The Fed kept the Fed Funds target range unchanged at 2.25%-2.5% but flung open the door to possible rate cuts this year. Reference to being "patient" on rates was removed and replaced with a comment on the increased uncertainty about the outlook, adding the text “…but uncertainties about this outlook have increased. In light of these uncertainties and muted inflation pressures, the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate…”

The first dissenter emerged under Chair Powell, with Bullard voting for an immediate rate cut, but this wasn’t really a surprise.  In the projections, inflation projections were nudged lower through to the end of next year, despite the unemployment rate being nudged lower, while the dotplot of appropriate Fed Funds levels showed a lowering of rate expectations – 8 out of 17 members saw lower rates this year, with 7 of them believing that two rate cuts would be appropriate. Heading into the announcement, the market was sceptical that so many FOMC members would downgrade their assessment of the rates outlook.

This change in view by a large number of FOMC members has solidified market expectations that the Fed is likely to cut rates at the next meeting at the end of July, while the market prices 70bps of cuts this year, compared to 59bps priced as of yesterday. The US Treasuries curve has steepened, with the 2-year rate down 10bps to 1.77% and the 10-year rate down 3bps to 2.03%.  While a large number of FOMC members see the need for some “insurance” rate cuts, the market sees the need for a more extended policy easing, with more than four rate cuts now priced through to the end of next year.  In the press conference Chair Powell said that “we haven’t really engaged yet on the size of possible cut”, which will leave some in the market believing that a 50bps rate cut is possible at some stage.

The USD fell on the announcement and is currently down in the order of 0.3-0.5%, with falls across the board.  The NZD rose to a high of 0.6563, but currently trades at 0.6550, although the market is see-sawing a bit as Chair Powell’s press conference is underway.

GBP has been the best performer, with gains ahead of the FOMC statement.  Boris Johnson extended his lead in his bid to become the next UK PM, winning nearly three times as many votes as the runner-up in the latest round of voting amongst Conservative MPs.  UK core CPI inflation slipped to 1.7% y/y but was a little stronger than market expectations. GBP is currently up 0.9% to 1.2670, while NZD/GBP has slipped to 0.5170.  The NZD is fairly flat on the other crosses, with NZD/AUD hanging in there around 0.95.

Headline CPI in Canada was stronger than expected, but the key core-common measure that the BoC focuses on was steady at 1.8% and slightly below market expectations.

NZ rates fell to fresh record lows yesterday and there will be further downside pressure on the open.  The 10-year government rate closed down 4bps to 1.59%, while swap rates were down 1-3bps cross the curve.

Domestically, the focus turns to Q1 GDP today, but even if growth matches consensus expectations of 0.6% q/q, there are lingering concerns about growth in the current quarter and the rest of the year.  RBA Governor Lowe’s speech might seal the deal for another rate cut next month and the market will be watching for signals about how deep the easing cycle might go.  The BoJ provides a policy update this afternoon, but its options are limited, with stimulus already “maxed-out” and seemingly ineffective to generate higher inflation.  The BoE’s policy outlook tonight will be heavily dependent on how Brexit fares and we are none the wiser on that.