Market movements have been well-contained ahead of the FOMC meeting this morning and in the initial aftermath of the statement, which didn’t surprise. We await Fed Chair Powell’s press conference, where he will likely be probed on the timing of the first rate hike, and there will be interest in how much he pushes back on market pricing for hikes from the second half of next year.
The US FOMC has just released its policy update and, as widely expected, the Fed is looking to taper its asset purchases by $10b a month for Treasuries and $5b a month for mortgage-backed securities from later this month. At this pace, the asset purchase programme will come to an end in June 2022, but the Fed said that it was prepared to adjust the pace of purchases if warranted by changes in the economic outlook.
On that note a key change to the FOMC statement was a rephrasing of the inflation picture, now saying that elevated inflation reflects factors that are “expected to be” transitory. The previous statement was more definite that elevated inflation was transitory. This was a signal of less confidence in the inflation outlook, conceding that high inflation might be prolonged. Based on the current taper plan, the earliest rate hike could come is July next year.
Ahead of Powell’s press conference, US equities are flat for the day, while US Treasury yields have ticked higher, having been up 2bps for day ahead of the FOMC statement, they are currently up 3-4bps. The USD is flat for the day, and the NZD and GBP have made modest gains for the day. The NZD trades this morning at 0.7130, notably outperforming the AUD, sending the cross to the 0.96. All these figures could change after Powell speaks, so we’ll leave it at that.
US data overnight were stronger than expected. The ISM services index unexpectedly surged to a fresh record high of 66.7, with business activity and new orders up to record highs. Order backlogs, supplier delivery times and prices paid remained a feature of the survey, reaching new highs. ADP private payrolls rose by 571k in October, which might lead to some upward revisions to non-farm payrolls estimates for Friday, with the consensus currently at 450k.
ECB President Lagarde was more direct in comments on the rates outlook after last week only half-heartedly pushing back on market expectations for a rate hike next year. Overnight she said that a hike in 2022 was “very unlikely”, with a subdued outlook for inflation over the medium term.
The Central Bank of Poland shocked the market again, delivering a 75bps hike in its policy rate to 1.25%, the largest hike in its history and Governor Glapinski saying “we will do whatever it takes to bring inflation back to target in the medium term”. This continues the theme of some central banks – mainly the smaller developed ones and in emerging markets – getting a move-on to reduce unnecessary policy stimulus.
The US Treasury announced the first reduction in quarterly auctions of longer-term debt in more than five years, reflecting reduced borrowing needs as pandemic-related stimulus diminishes. This comes at an opportune time, as the Fed tapers its bond purchases, reducing the impact of this policy action on the market. Treasury will auction $120b of long-term securities next week, a reduction of $6b from the recent record levels.
The spread of COVID19 across China is worsening, with more than 600 community cases now tallied in over half of the 31 Provinces in the latest outbreak. We see the government’s elimination strategy as significantly reducing domestic demand as lockdowns become more widespread and this a key risk factor to watch for the global economy.
Oil prices are down about 3%, ahead of the OPEC+ meeting. The EIA reported higher US crude production, leading to higher US inventories. Still, there is some pressure (including from the White House) on OPEC producers to lift production faster than so-far outlined. Brent crude sits this morning at USD82.40 per barrel, down from a high of USD86.70 last week.
NZ labour market data showed surprising strength in employment in Q3, driving a plunge in the unemployment rate to a 14-year low of 3.4%. Wage data didn’t positively surprise, but a couple of key series showed annual wage inflation running at over 4%. The strength of the labour market and high wage inflation are consistent with the over-heating, over-stimulated economy thematic in play all year. This will require the RBNZ to deliver a long series of rate hikes to get the OCR back to at least a neutral level to validate the recent market-led tightening in financial conditions – which is already behind a meaty increase in borrowing rates facing households and businesses. Market reaction to the strong data in net terms was fairly minimal, following a knee-jerk lift in the NZD and short rates.
The domestic rates market had a whippy session, falling on the open on the previous night’s offshore moves, surging on the labour market data, before cool heads brought rates back down. RBNZ Governor Orr spoke at FEC after the release of the Bank’s Financial Stability Report (which didn’t add much new from his housing market speech the day before) and noted that labour market data are highly volatile at present. This was code for not reading too much into the data, particularly with the survey period capturing a period of significant lockdown restrictions.
The datasheet shows a flat 2-year swap rate on the day, but that encompassed a 12bps range of 2.21-2.33%. The long end of the curve was also whippy, but with the net change being a 7bps fall in the 10-year swap rate. The NZGB curve showed a flattening bias as well, albeit with only a 2bps fall in the 10-year rate to 2.52%.
The key focus in the day ahead will be the Bank of England’s policy update. Economists are evenly split on the Bank Rate, with 23 out of 45 surveyed by Bloomberg picking no change while 22 pick a 15bps lift to 0.25%, kicking off a rate hike cycle. We think the MPC will be split, but the odds favour a rate hike and the market is well priced for this.