Markets consolidate ahead of FOMC tomorrow morning. UK set for December election – GBP receives initial boost. NZ rates move sharply higher yesterday – some nervousness around a Nov OCR cut.

Markets have consolidated overnight ahead of the FOMC meeting tomorrow morning. The US 10 year Treasury yield has drifted back slightly after reports that the Phase-One US-China deal might not be signed at APEC, although progress was still being made. Yesterday NZ rates moved sharply higher, playing catch-up after Monday’s holiday, as the market scaled back its probability of a November OCR cut to 75%. Currency moves have been subdued overnight, but the GBP received an initial boost after Labour dropped said it would support a December election.

There are a multitude of key event risks over the coming few days starting with US GDP tonight and the FOMC meeting tomorrow morning, followed by the BoJ monetary policy meeting on Thursday and payrolls and ISM data on Friday. Ahead of those key events, markets have been in a holding pattern overnight. The S&P500 is up slightly (+0.05%), to a fresh record high, supported by generally better than expected earnings results. 78% of S&P500 companies that have reported to date have analyst beaten expectations so far this earnings season. The NASDAQ has underperformed, and is down 0.4% on the day, with Alphabet’s weaker than expected earnings after the bell yesterday weighing on the index. The NASDAQ is also near its all-time high.

On the trade front, Reuters reported that the so-called Phase-One agreement between the US and China might not be ready to be signed at the APEC meeting in Chile next month. Those headlines caused a short-lived dip in both equities and bond yields although a closer read of the article suggested that any delay would be due to timing constraints rather than a lack of commitment on either side. The article claimed good progress was still being made and the expectation is for an agreement at APEC.

Global rates have consolidated after their sharp rises over the past few days. The US 10 year Treasury is down a few bps to 1.84%, but remains close to six-week highs. There was little reaction to a weaker than expected US consumer confidence release, which was dragged down a drop in consumers’ future expectations. As for the FOMC meeting tomorrow, the market prices around a 90% chance of a 25bp rate cut which would take the upper-end of the Fed funds Target range down to 1.75%. There will be no updated set of projections (the so-called “dot plot”) at this meeting but Chair Powell will have a Q&A. The market is focused on the policy rate outlook and whether Powell signals a pause or makes future easing more conditional. The market prices around 30bps of additional rate cuts into the futures curve after October which signals that the market still sees future easing as more likely than hikes.

Currency moves have also been subdued for the most part, with all the G10 currencies between +/-0.3% from this time yesterday. The GBP received an initial boost after Labour leader Corbyn said his party would support a December general election, on either the 9th or 12th of December. The bill will be voted on later this morning but is almost certain to pass given Labour’s support. The positive initial reaction in the GBP to Labour’s announcement (the GBP moved from around 1.2820 to above 1.29) might suggest that the market expects the Conservatives to do well; the betting markets assign around a 50% chance that they will achieve an overall majority. But the initial GBP rally hasn’t been sustained and it has drifted back to unchanged on the day.

The AUD has been the best performing G10 currency over the past 24 hours, up 0.3% to 0.6860. There was little market reaction to RBA Governor Lowe’s speech last night in which he largely repeated previous comments. Lowe signalled that the RBA still has a clear easing bias (“the Board is prepared to ease monetary policy further if needed”) and that an extended period of low interest rates would likely be needed to reach full employment and the inflation target. On unconventional policy, Lowe’s view was that negative rates were “extraordinarily unlikely” in Australia while in the Q&A he took these comments further, saying that negative rates were having a “pernicious” effect on the functioning of the financial system and pension system in Europe.

The NZD is unchanged from this time yesterday, at 0.6350. The NZD and NZ rates were supported yesterday by a speech from RBNZ Assistant Governor Christian Hawkesby, although the NZD has since given back those gains overnight. Hawkesby reiterated recent messages from the Bank about August’s 50 point cut being a front-loading of stimulus and the path of least regret from a tactical perspective. He also suggested that market participants should focus more on what the RBNZ should do at any given meeting, rather than thinking the central bank is tied into a set course of action, either because of what it has previously said or because the market prices an outcome. We didn’t interpret that as a suggestion that the RBNZ was necessarily thinking of surprising the market again next month, but the market pared back its November rate cut expectations a little further – the meeting is now 75% priced for a cut, having been more than fully-priced earlier this month.

Since the September OCR Review, the news-flow has arguably been better on the global front (less downside risks from the trade war and Brexit) but mixed domestically (non-tradables inflation was higher than expected but business surveys point to further weakening in activity). We think the RBNZ will conclude that downside growth risks domestically warrant another 25bps cut in November and that it will view this as helping to support inflation expectations, another focus of Hawkesby’s speech.

NZ rates rose aggressively yesterday, playing catch-up to the global moves on Friday night and Monday in response to better mood music around US-China trade talks. The NZ 2 year swap rate rose 5bps to 0.98% while the 10 year swap rose 10bps to 1.43%. Despite the large moves, that merely brings NZ rates back to where they were in the middle of last week.

NZ government bond yields rose by slightly more than swap rates, including a chunky 12bp rise in the 2037 maturity bonds, after Bloomberg reported on a Treasury briefing to Finance Minister Grant Robertson that warned S&P could remove the positive outlook on NZ’s sovereign credit rating. There was also a short-lived blip down in the NZD on the headlines. Were S&P to remove the positive outlook we would expect hardly any market impact. The bigger medium-term upside risk to longer-term NZ rates comes from the potential for the government to implement additional fiscal stimulus at some point, which would increase the supply of government bonds and take some of the pressure of monetary policy to support the economy.

The focus in the New Zealand session today is the release of Australia CPI this afternoon. Our NAB colleagues look for an on-consensus 0.4% increase in the trimmed mean measure of core inflation. US Q3 GDP is released tonight (1.6% q/q% annualised expected) before the FOMC meeting at 7am tomorrow. The Bank of Canada also meets tonight.