Most markets are tracking sideways, ahead of the FOMC announcement due in about 24 hours. US equities are little changed around their record high levels, the US 10-year rate continues to hover around the 1.6% mark and currency movements have been minimal. The NZD currently sits just under the 0.72 mark and AUD around 0.7750.
One might be forgiven for thinking the US is on holiday, given the lack of movement in financial prices overnight. The S&P500 is flat and the US 10-year rate has traded a tight 1.585-1.62% range. A 20-year bond auction saw solid demand and priced at 2.29%, some 2bps lower than the pre-sale yield which had risen leading up to the auction. The USD BBDXY index is also flat. Markets are in a holding pattern, ahead of the Fed meeting and FOMC statement due at 7am tomorrow, NZ time.
A string of weaker US economic data barely caused a ripple. Retail sales were much weaker than expected in February, plunging 3.3% m/m, but the surge in January was revised even higher, up 2.4 percentage points to 7.6% m/m. The market was unperturbed, with the mid-month storm likely a big factor and traders are prepared to look through the volatility in the series. It’s hard not to be positive on the outlook when households have been given another big fat cheque, courtesy of Biden’s stimulus package, and accounts are already overflowing from previous payments and an inability to spend it during lockdowns.
The softer than expected readings for industrial production and the NAHB housing index were also brushed aside as being affected by recent weather conditions.
The vaccination rollout in the EU remains in disarray after at least 16 countries suspended or limited the use of the AstraZeneca vaccine after a few reports of blood clotting after administration. The European Medicines Agency reiterated that the vaccine’s benefits outweighed its risks. Italy recently reintroduced harsher lockdowns after new infection rates increased, while the same trend is also being seen in Germany. The equity market doesn’t seem particularly concerned, with the Euro Stoxx 600 index rising 0.9%, but the currency market is taking note. The euro has been an underperformer of late and is bottom of the leaderboard again overnight, albeit down only 0.2% to around 1.19.
There is not much to say about other currencies, which show little change. The NZD has tracked sideways over the past 24 hours centred around the 0.7190 mark. The AUD has done the same, around the 0.7750 mark.
The GDT dairy auction price index fell by 3.8%, following the previous 15.0% surge, led by a 6.2% fall in whole milk powder. There was always a good chance of a significant pullback in pricing, given the prior surge and Fonterra ramping up volumes, so the latest auction won’t see any revision in milk price assumptions.
The domestic rates market was quiet but prices were marked lower across the curve, with some notable curve flattening. Significantly lower yields at the long end were driven by global forces, namely much lower Australian rates. The 10-year NZGB and swaps both fell 7bps to 1.76% and 1.94% respectively.
In the day ahead, NZ’s annual current account deficit is expected to remain close to a below-average 0.8% of GDP.
It should be another quiet trading session ahead of the 7am FOMC announcement, and we’ll hold back publication of tomorrow’s Markets Today to capture the essence of the statement and any immediate market reaction. The Fed will release updated economic and interest rate projections, with Bloomberg reporting that most economists think the median Fed forecast will show the cash rate remaining on hold through to the end of 2023, the same as December. However, given the improvement in growth and inflation expectations since December, in part due to the passing of Biden’s massive $1.9tn fiscal stimulus, the risks are clearly skewed towards the forecast timing of that first hike being brought forward, into 2023.
Fed Chair Powell is also likely to be pressed on the recent rise in bond yields and whether the Fed would respond. But with financial conditions still exceptionally easy, the likelihood is that he maintains a similar line to his speech a few weeks back – acknowledging much of the increase in yields is due to ‘good news’ and it will likely require a sustained tightening of financial conditions and/or a return of disorderly market conditions to justify a more aggressive pace of bond buying.