Markets were trading nervously ahead of the much-anticipated FOMC announcement, with US long-term bond yields shooting higher, boosting the USD and sending equity markets lower, led by the tech sector. Two hours prior to the announcement, the US 10-year rate broke up through 1.685%, the highest level since early 2020, while 10-year inflation break-evens hit an eight-year high of 2.33%. In early trading the S&P500 was down as much as 0.7%, while the Nasdaq was down 1.5%.
In the event, the market was relieved to see that the Fed’s policy outlook was little changed. There was much interest in what the “dotplot” of FOMC member rate projections would show. The update showed that just 7 of 18 officials saw at least one rate hike in 2023, up slightly from 5 of 17 back in December, so the median member still saw no change in the Fed Funds rate until at least 2024. And this rate projection sat alongside median core inflation projections of 2.0-2.2% through the next three years. This suggests consistency with the Fed’s view that it will tolerate a period of above-target inflation before considering raising interest rates.
The Fed’s other projections showed a strong rebound in GDP growth to 6.5% in 2021 (previously 4.2%) and 3.9% in 2022. The unemployment rate falls to 4.5% in 2021 and back to 3.5% by the end of 2023. It is remarkable that even with a much stronger economy, the unemployment rate heading to 3.5% and inflation moving above target, most Fed officials will still be unmoved on interest rates. History shows that policy guidance doesn’t get much more dovish than this!
The Fed’s QE policy remained unchanged – the Fed will continue to buy at least $80b per month of Treasuries and at least $40b per month of mortgage backed securities until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.
Immediately after the Statement the bond market showed little change, with the 10-year rate at 1.66% as we go to press. Equity markets reversed course, with the S&P500 trading into positive territory and the Nasdaq index flat. The very dovish outlook despite the economic backdrop saw the USD fall back, with the BBDXY index now down 0.25% for the day. The NZD was trading at 0.7160 pre-announcement and has now shot up through 0.72. The AUD briefly went sub 0.77 pre-announcement and has shot up to 0.7770. All these figures could change as Fed Chair Powell is about to deliver his Press Conference.
Earlier in the day, both US housing starts and permits undershot market expectations, both down more than 10% m/m in February, with weakness attributed to the severe mid-month storm as well as a natural pullback from recent strength. Canadian CPI inflation indicators remained benign but, like the US, are expected to pick up over coming months.
The domestic rates market showed little movement in yields yesterday against a backdrop of tight range trading in Australian bond futures. Figures showing NZ’s annual current account deficit remained unchanged at an historically low figure of 0.8% of GDP didn’t move the needle. Neither did media reports that a Trans-Tasman bubble, alongside the Pacific Islands, could be up and running by mid-April. Opening the borders up to global tourism in April would be much earlier than the RBNZ assumed and would give a welcome boost to confidence and the economy.
Domestic rates look set to rise on the open, with the implied yield on the Australian 10-year future up in the order of 6-7bps since the NZ close.
NZ Q4 GDP data are released today. although the data are so dated that we find it hard to believe any sustained market reaction will occur. The big picture is one of the NZ economy tracking sideways after the huge rebound in Q3, given the hit from a lack of global tourists and confidence being sapped as the country moves in and out of temporary lockdowns. Estimates for the quarter are wide-ranging, mostly contained between -0.5 to +0.8, which is fair. The Australian labour market report is expected to be another good one, seeing the unemployment rate tick lower. The Bank of England policy announcement tonight shouldn’t result in any changes to policy, with the Bank expected to adopt a wait-and-see approach.