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US Fed upgrades economic assessment but remains dovish on the policy outlook. USD broadly weaker pre and post FOMC announcement. USTs range trade, US equities a touch higher. NZD outperforms, up 0.7% to 0.7260

Currencies
US Fed upgrades economic assessment but remains dovish on the policy outlook. USD broadly weaker pre and post FOMC announcement. USTs range trade, US equities a touch higher. NZD outperforms, up 0.7% to 0.7260

US and European equity markets are broadly flat and there has only been a small reaction to the Fed’s policy update this morning. The 10-year Treasury rate has been range-trading. The USD was broadly weaker ahead of the FOMC announcement and pushed down further after Powell’s dovish comments. The NZD has been one of the better performers, up 0.7% to 0.7260.

The Fed latest monetary policy update showed an upgrading of the economic assessment, acknowledging that economic activity and employment had strengthened and noting that inflation had risen, “largely reflecting transitory factors”. The Fed said that “risks to the economic outlook remain”, softening previous language that referred to the pandemic posing “considerable risks”. The policy outlook and $120b monthly rate of Treasury and MBS bond buying remained unchanged.

In the press conference, Chair Powell reiterated the view that “it is not time yet” for talk about tapering the bond purchase programme, repeating his prior stance that any tapering of bond purchases will be telegraphed well in advance.

The S&P500 is slightly higher for the day, continuing to hover near its record high. After the close, Apple and Facebook will release their results. The US 10-year rate has traded a tight 1.61-1.65 range – yields were tracking a touch higher pre the FOMC announcement and have fallen slightly since, following Powell’s dovish comments.

Last night President Biden unveiled yet another massive fiscal plan called the “American Families Plan” worth $1.8 trillion, ahead of his keynote speech early afternoon NZ time. The plan sees $1000b of further spending directed towards education and child-care and $800b in low-middle income tax cuts over the next decade, funded with higher taxes for high income earners. The plan comes hot on the heels of the $1.9t fiscal stimulus package already passed and the proposed $2.3t infrastructure bill to be paid with by higher corporate taxes. The two latest plans have no guarantee of passing, given the Democrats’ slim majority. Imposing the tax plans would lift the top marginal tax rates above 50% for 13 States which would likely have unintended economic consequences.

In economic data, the US goods trade deficit blasted up to a fresh record high at over $90b for March, a consequence of over-stimulating the economy and stoking imports, whilst incentivising the unemployed to stay at home and remain unproductive. Canadian economic data continue to positively surprise, with a strong 4.8% rebound in core retail sales in February, helped by reduced lockdown restrictions.

The USD was broadly weaker ahead of the FOMC announcement and has weakened a touch further since. The NZD has been one of the better performers. After seeing some slippage to below 0.72 during local trading hours, the NZD has trended higher since, now up some 0.7% to 0.7260. Amongst the commodity currency bloc, CAD has showed a similar gain, but AUD has lagged, following a soft CPI reading yesterday.

The Australian CPI came in weaker than expected for both the headline and core measures, with the RBA’s preferred trimmed mean measure up just 0.3% q/q and 1.1% y/y, the lowest annual increase in the forty-year history of the series. The low inflation reading comes ahead of the RBA’s policy update next week and can only reinforce the Bank’s message that conditions won’t be met for a rate hike until “2024 at the earliest”.

Still, with a weaker USD backdrop, the AUD has regained its losses since post-CPI and trades this morning near the 0.78 mark. NZD/AUD blasted up through 0.93 immediately after the CPI announcement and drifted up as high as 0.9330 overnight. EUR and GBP have only made small overnight gains against the USD, while USD/JPY has been flat, hovering just under the 109 mark.

Yesterday afternoon Bloomberg published the first ever interview with an external MPC member. There were no fresh insights as Peter Harris ran the party line, looked to defend the RBNZ’s policy stance and showed off his left-wing credentials. He noted signs of the economic recovery stalling as the impact of the massive fiscal stimulus waned. While there was no mention in the interview that the inflation target had been met (we believe it has, with core inflation measures around 2%) he noted that the current unemployment rate at 4.9% was “relatively high” and reiterated the MPC’s assessment that employment is still below its maximum sustainable level”.

Yesterday, domestic rates showed little movement in swap rates and there was a minor curve steepening for NZGBs. The World Bank ended up issuing $1000b worth of 7-year Kauri bonds, meeting very strong demand.

In the day ahead, the final readings of the April ANZ business outlook survey will be published, adding a bit more colour to the early estimates. The key release tonight will be US Q1 GDP, which is expected by the market to be a boomer result of an annualised 6.9%, with some estimates north of 9%. The core PCE deflator is expected to lift to an annualised 2.4%, but seen to be temporary by the Fed.

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