Fed Chair Powell was evidently more hawkish than the market expected, with his comments sending short rates higher, inverting the 2s10s curve to more than 100bps, driving the USD higher and equities weaker. The AUD and GBP have been hit harder than others, following a softening of the RBA’s tightening bias and the BoE’s Mann warning of a weaker pound ahead. The NZD has fallen to a fresh low for the year just under 0.6125.
Well, we’ve all seen the dataflow since early February of stronger US economic activity and sticky inflation, which has led the market to price in a much more aggressive policy stance by the Fed, with more hikes and less scope for easing which, until today, meant the Fed Funds rate priced over 110bps higher from mid next year compared to the level prevailing at the end of January.
In his testimony to lawmakers overnight, Fed Chair Powell basically acknowledged he hadn’t been in a coma for the past month and yet somehow managed to hawkishly surprise the market in his comments. In his opening remarks to lawmakers he noted that inflation has been moderating in recent months but “the process of getting inflation back down to 2% has a long way to go and is likely to be bumpy”. He added that “the latest economic data have come in the stronger than expected which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated. If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”
None of that should really have surprised, but hearing it all from the man himself has driven a notable market reaction. The Fed Funds market now sees more chance of a 50bps hike later this month than 25bps and a full further 100bps of tightening is now priced. The 2-year rate has risen to just shy of 5% (4.975% peak), a fresh high at a level not seen since 2007. The 10-year rate met some resistance (again) at 4% and is currently down 2bps for the day at 3.95%, seeing the 2s10s scale of inversion breaking minus 100bps, a level not seen since the early 1980s. The USD is broadly stronger, with DXY index up 1%, re-testing its late-February high.
It all looks like a bit of an over-reaction to those who have been watching markets for the past month or so and at the end of the day the Fed remains data-dependent. One of Powell’s last comment before the testimony ended was that the data between now and the March meeting will be very important. Friday’s employment report and next week’s CPI report will determine whether there is a sharp retracement or whether today’s market moves have been entirely justified. That the Fed is focused on lagging indicators to guide policy decisions will worry those who think the Fed could over-tighten this cycle, hence the deeply inverted yield curve, a harbinger of economic recession.
Also getting the market’s attention overnight were comments by BoE MPC member Catherine Mann, who sits at the hawkish end of the spectrum. Her view on the need for more aggressive BoE rate hikes has been a minority position and she strayed into currency markets, suggesting that the pound could fall further as the Fed and ECB hike rates further – she clearly would prefer the BoE to follow that trend but has been out-voted. GBP has been one of the weakest key majors, second only to the AUD after the RBA’s update yesterday (see below), down 1.6% from this time yesterday to 1.1850.
The RBA hiked its cash rate by 25bps to 3.6% but softened its policy guidance, adopting an open mind about the extent and pace of further hikes. There was a hint of data dependency with reference to “when and how much further” tightening of monetary policy will be needed. The market saw this as a possible pause in April after the RBA’s ten consecutive rate hikes. There will be further dissection of the policy outlook after Governor Lowe speaks this morning but the market’s reaction so far has been to drive the rates and the AUD lower. The 3-year bond yield fell as much as 18bps in the following hours after the release, with a partial reversal overnight but still down 11bps. Adding in the stronger USD post-Powell, the AUD has fallen below 0.66 for the first time since November, down 2% from this time yesterday.
The NZD has traded at a fresh low for the year just below 0.6125. NZD/AUD ran up through 0.93 briefly overnight and is currently 0.9280. NZD/GBP is modestly higher at 0.5165 and the NZD is down on all the other key crosses, with NZD/EUR sub-0.58 and NZD/JPY sub-84.
The overnight GDT dairy auction showed a mild 0.7% fall in prices, with whole milk powder little changed (up 0.2%) and skim milk powder down 1.1%.
US equities fell after Powell’s opening remarks were published and the S&P500 fell just over 1%, the fall moderating a little as we go to print.
In the domestic rates market the focus was on the syndication of the new 2030 nominal bond, which caused a sharp swing in rates. Global forces sent rates higher from the open and some nerves about how the extra supply would be absorbed pushed rates even higher. In the event, NZDM issued $4b of the new bond, below the maximum $5b it was seeking and priced at 4bps over the 2029 bond, compared to initial price guidance of 2-5bps. Rates steadily fell through the afternoon, with longer dated NZGBs ending the day unchanged and up 1-2bps for short-mid dated bonds. Swaps were 4-5bps higher, seeing some expansion in swap-bond spreads.
The RBA announcement was after the NZ close, so the bias for NZ rates will be to the downside from the open, with 3- and 10-year Australian bond futures down 11bps and 9bps respectively in yield terms since.
In the day ahead, we’ve noted RBA Governor Lowe’s speech this morning. The Bank of Canada is expected to pause its tightening cycle as previously guided while Fed Chair Powell will re-appear before lawmakers, this time the House, with the same message. On the data front, there will be some interest in US ADP private payrolls and the JOLTS report on the labour market.
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