Markets were quiet ahead of the FOMC announcement this morning. The market has taken the statement as hawkish relative to expectations, more so after Fed Chair began speaking at the press conference. This sees the USD bid higher and US rates reversing the falls seen earlier in the day.
As expected, the Fed cut the Fed Funds target range by 25bps to 1.75-2.0% and it cut the interest rate on excess reserves by 30bps to 1.7% to help keep the effective Fed Funds rate within that range. This time dissents were in both directions, with George and Rosengren arguing for no cut (again), while Bullard argued for a 50bps cut.
The Fed’s dotplot of the appropriate projection for the Fed Funds rate highlights the dispersion of views, with 7 members seeing the need for another cut by year-end, 5 members seeing rates unchanged and 5 members believing that the range should not have been lowered (so have the Fed Funds rate 25bps higher from the new, lower rate). The median “dot” is consistent with no further reduction rates this year or next. The market still fully prices another full rate cut by the end of the year and a further 40bps of easing through next year.
There were minimal changes to the Fed’s economic projections and the policy outlook statement was unchanged from July. The only changes made to the statement were the acknowledgement that household spending had been rising at a strong pace while business investment and exports had weakened.
In his opening address at the press conference, Chair Powell remained positive on the economic outlook and argued that today’s rate cut was to provide “insurance” against the risks. When asked if this was still a mid-cycle policy adjustment, he agreed but offered that if the economy weakens then a more extensive series of rate cuts could be appropriate. When asked whether the FOMC still had an easing bias, Powell said “we don’t” and argued that policy will be data dependent.
The initial market reaction was a slightly stronger USD and slightly higher rates and those moves extended early in Powell’s press conference. For the day, USD indices are up around 0.3%. The NZD hit a low of 0.6300 but is looking to recover slightly as we go to press. While the NZD has more or less performed in line with the AUD, seeing the cross steady at 0.9255, other NZD crosses are weaker for the day.
The US 2-year rate has traded a wide range, falling to as low as 1.66% before the FOMC announcement and rising to as high as 1.77%. The 10-year rate was 1.74% pre announcement, down 6bps for the day and it currently sits at 1.79%, now down only 1bp for the day.
Before the Statement, there were signs of further dislocation in the “plumbing” of funding markets, with the Fed offering to inject another $75b to help reduce money market rates, and this amount was fully soaked up. The effective Fed Funds rate still hit 2.30%, above the top of the prevailing 2.0-2.25% target range.
In other news, President Trump tweeted that he had instructed the Secretary to the Treasury to substantially increase sanctions on Iran. Both the US and Saudi Arabia believe Iran was behind the strikes on Saudi oil facilities, with the US’s Pompeo saying he had “high confidence” in this and Saudi Arabia’s defence ministry saying the attacks were” unquestionably sponsored by Iran”. Oil prices have continued to ease off as Saudi production comes back on line, with Brent crude down nearly 2% to USD63.40, now up only 5% from the pre-attack level.
US economic data continued to surprise on the high side, with housing starts and permits both surging to their highest level since 2007, fuelled by lower mortgage rates. UK inflation was much softer than expected, with annual core CPI inflation down to 1.5%. The BoE meets tonight, but any policy decisions are on hold until the fog of Brexit clears. Core Canadian CPI inflation remained steady at 2.0%, supporting the view that the BoC can hold its ground longer before joining the easing party.
Yesterday in the local rates market, the syndication of $2.0b of a new May 2031 nominal bond was completed, with a book size in excess of $3b within the initial pricing guidance of 13-17bps over the April 2029 bond and issued at a spread of 16bps, or a yield to maturity of 1.42%. NZ’s 10-year government rate ended the day down 4bps to 1.24%, while the swaps curve showed minimal changes.
In the day ahead, NZ Q2 GDP data this morning are expected to be fairly soggy. We see slight downside risk to the consensus estimate of 0.4% q/q and RBNZ estimate of 0.5%. Australian employment data this afternoon will be important. A rise in the unemployment rate (not expected by the consensus) would add to the case for the RBA to bring forward the next rate cut to next month.
Policy decisions by the BoE and BoJ should pass with little market reaction. BoE policy is currently contingent on how Brexit evolves, while the BoJ’s policy options from here are severely limited, even as inflation continues to well undershoot target.