The FOMC minutes have been the headline act overnight, but they revealed nothing much new. US equities have traded with a slightly cautious tone and US Treasuries are little changed. USD strength leading up to the minutes faded after their release. Despite a rocky road over the past 24 hours, the NZD shows little net change from this time yesterday after absorbing the RBNZ’s MPS.
The key news overnight was the release of the FOMC minutes from the July meeting. Leading into their publication, market price action suggested that there were some nerves that they could contain a hawkish surprise. In the event, the minutes revealed little new.
Most participants judged that the Committee’s standard of “substantial further progress” toward the maximum-employment goal had not yet been met while all participants judged that the economy has met the inflation part of the metric required for the taper. The key line of forward guidance was that “Most participants anticipated that the economy would continue to make progress toward those goals and, provided that the economy evolved broadly as they anticipated, they judged that the standard set out in the Committee’s guidance regarding asset purchases could be reached this year.”
That view aligns with market expectations, with the only question being which month the decision to taper will come. And nothing much has changed to the extent that it will likely depend on the data, namely the key employment report, and the course of the virus. Furthermore, rate hikes will not come until the end of the QE programme, likely well into the second half of next year, and there is a lot of water to pass under the bridge until we’ve reached that point.
Ahead of the FOMC minutes, US equities traded slightly weaker, the US 2 and 10 year rates drifted higher and the USD was in the ascendancy, all suggesting that the market was anticipating that the minutes might deliver a hawkish surprise. Post minutes, US equities have remained moderately weaker, but the USD has weakened and the 10-year rate has nudged lower. The net result is that the BBDXY USD index is little changed for the day and same for the 10-year rate, currently at 1.27%.
Economic data releases were largely ignored, with only fleeting market movements around their release. Canada CPI data for July were much stronger than expected, with annual headline inflation rising to 3.7% and the average of three core measures up to 2.5%, following a similar theme seen in the US and NZ of late. Going against the grain, in the UK annual headline CPI inflation fell to 2.0% and core inflation fell to 1.8%, although this blip down is widely seen to be temporary, ahead of inflation rising up to 4.0% on BoE projections, and slightly less than that on market estimates. US housing market data were mixed, with permits rising by more than expected and starts falling by more than expected.
Ahead of the minutes when the USD was heading higher, EUR fell to its lowest level since November last year, trading below 1.17 while even the yen was weak, with USD/JPY rising to 110. The AUD traded a fresh year-to-date low of 0.7229, before bouncing post FOMC minutes to 0.7250.
The NZD weakened overnight, trading back below 0.69 but has since regained the 0.69 handle after the FOMC minutes. It was a wild ride yesterday amidst the release of the RBNZ’s Monetary Policy Statement, with support of 0.69 breaking and a fresh low of 0.6870 printed, but the NZD recovered its losses after a careful read of the Statement, resulting in little net change. Clearly, global forces remain in charge for the NZD, with USD strength leading to a move back down to around 0.6880 overnight and currently back around 0.69.
The thrust of the RBNZ’s Monetary Policy Statement was that the Bank was ready to deliver a long series of rate hikes to bring the OCR at least to a neutral level (estimated at about 2%), but the COVID outbreak that was discovered 24 hours earlier resulted in an immediate re-think. This was obvious by the phrasing “Emergency levels of monetary stimulus are no longer warranted given the strength in employment and rising inflationary pressures. Our central projection implies that monetary stimulus should be reduced to ensure the MPC meets its objective”, but the MPC agreed to “keep the OCR unchanged at this meeting given the heightened uncertainty with the country in a lockdown”.
The initial market reaction was to take rates and the NZD lower on the headlines of a no-change decision in a market half-expecting a rate hike, but a close reading of the mainly hawkish document saw a quick reversal. From a pre-MPS level of 1.23%, the 2-year swap rate traded down to a low of 1.175%, before zipping higher and closing the day little changed at 1.26%. The steeper path of future tightening fed into longer term yields, with the 10-year swap rate closing the day up 3bps at 1.95%. The NZGB market also saw a steeper curve, with rates barely higher at the short end and the 10-year rate up 4bps to 1.68%.
At the close, the market was willing to price in a good chance that the rate hike cycle kicks off from the next meeting in October (19bps priced), but unwilling to fully build in two rate hikes for the year, given the uncertainty around the length of the current lockdown. The market was also unwilling to price rates going as high as the Bank projects, with the curve still weighed down by the global backdrop. The RBNZ’s policy actions ahead are likely to be heavily dependent on the course of the virus.
As we go to print there doesn’t appear to be much fresh COVID19 related news for NZ. The number of community cases of COVID19 rose to 10 yesterday, with 9 of those cases connected and one case linked to the border, providing a line of inquiry that might reveal the initial source of infection into the community.
In the day ahead, after a very strong run, Australian labour market data are expected to soften, given the widespread lockdowns, with a fall in employment and a tick higher in the uemployment rate to 5.0%. Tonight, US jobless claims and the Philly Fed business outlook index was expected to show some modest improvement.
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