Fed stimulus to remain at full-throttle. Sees US 10-year lower, dragging USD down. NZD and AUD print fresh multi-month highs

US bond and equity markets have been supported by the FOMC statement this morning which reaffirmed the Fed’s commitment to keep the “pedal to the metal” to support the US economy. The S&P500 is back into positive territory, the US 10-year rate is down 8bps to 0.74% and the USD is weaker. The NZD and AUD have benefited from higher risk appetite, seeing fresh multi-month highs printed.

The US FOMC announcement released this morning reiterated the Fed’s commitment to support the US economy, repeating this at the top of its press release. With considerable risks to the economic outlook over the medium from the ongoing public health crisis, the Fed maintained its forward guidance of keeping the Fed Funds target range at 0-0.25% until it was confident the economy was on track to achieve it policy goals. The separate NY Fed release said that the FOMC directed it to buy securities “at least at the current pace” to sustain the smooth functioning of markets, which is approximately $80b per month for Treasuries, $40b per month for mortgage backed securities.

The FOMC’s median projections saw GDP down 7.6%-5.5% in 2020, rising 4.5%-6% in 2021, inflation running below the 2% target through 2022, and the Fed Funds rate unchanged through 2022.

With the Fed maintaining its policy stimulus at full-throttle and no sign that it was wavering, even in the face of buoyant equity markets, the market was encouraged to give risk assets another nudge up. The S&P500 is currently flat after spending much of the pre-FOMC session in negative territory. The US 10-year Treasury rate was already down 5bps ahead of the meeting, and after a brief blip higher, it is on its way lower, currently down 8bps to 0.74% as Chair Powell’s press conference gets underway.

Chair Powell reiterated the Fed’s commitment to using its full range of tools “as long as it takes” and to keep using emergency lending powers “forcefully”. On a possible move to yield curve control, Powell said that it was still an open question.

The USD, already in the midst of a downturn evident over recent weeks, was pushed lower post-FOMC, with the lack of yield support now and for years to come on the Fed’s projections. Risk currencies like the NZD and the AUD have been key beneficiaries. The NZD printed a high of 0.6584, while the AUD reached 0.7063. But with broadly-based USD weakness, EUR has blasted up through the 1.14 mark and GBP up through 1.28, while USD/JPY nudged just below 107. Currencies are jumping around a bit as we go to press with Powell’s press conference still underway, and the USD is regaining some poise as we hit “send”.

In other news overnight, the WSJ reported that the US government plans to fund and conduct decisive studies of three experimental coronavirus vaccines starting next month, according to a lead government vaccine researcher. The phase 3 trials will involve tens of thousands of subjects, marking the final stage of testing. The timetable suggests researchers are making rapid progress, advancing their vaccines through earlier stages of testing. To that list we can add Pfizer, which is outside of the government programme and is also due to start phase 3 testing as early as next month.

Ahead of the FOMC release, the US core CPI fell for the third consecutive month and slightly undershot market expectations, dragging down the annual increase to 1.2% yoy, the weakest in nine years. The deflationary pulse should ease from here, as activity levels pick up, but a large negative output gap should ensure that weak inflation remains an enduring theme. Weak inflation data from China – with PPI deflation approaching 4% – suggested that the country was still “exporting” deflationary pressure around the world.

The OECD published a forecast update which showed two equally probably scenarios – global growth down 6% in 2020 if a second wave of COVID19 infections can be avoided or falling 7.6% if a second wave before the end of the year leads to renewed lockdowns. Under either scenario, world GDP won’t be back at end-2019 levels until at least two years.

Yesterday, NZ manufacturing data were the last of the partial indicators released that will feed into Q1 GDP estimates. They were stronger than we expected, leading to an upward revision of our Q1 GDP forecast to minus 0.8% q/q (previously minus 1.0%). But the data will be of less interest compared to Q2, where we expect that NZ’s severe lockdown will lead to an unprecedented 19% q/q economic contraction, a much bigger decline than elsewhere, but followed by a massive reversal in Q3, given the fairly rapid easing of restrictions.

The domestic rates market was quiet yesterday, with little change in the swaps curve and a small fall in government rates, seeing the 10-year bond down 2bps to 0.96%. The RBNZ’s LSAP programme saw good volume of offers, with the nominal 27s and 33s going off around mids. Today sees the NZDM issue $1.05b of bonds, $500m of 23s, $350m of 29s and $200m of 37s, ahead of next week’s syndication of a new 2024 bond, so there will be plenty of forthcoming supply at the end short.

In the day ahead, NZ card spreading data should show a massive recovery for May, while US jobless claims data tonight will remain of some interest.