Comments by Federal Reserve Chair Jerome Powell appeared to support a pause at the June FOMC. US treasury yields and US Dollar move lower following Powell’s comments

There was limited first tier economic data released on Friday night which saw the market focus on comments by officials from the Federal Reserve and the latest developments surrounding the US debt ceiling negotiations. US equity markets were little changed on the day, albeit with the S&P making a new 2023 high intra session, which completed the rebound from the lows in March when investor’s concerns about the US banking sector peaked. The S&P weekly performance, up 1.7%, was the best since March while technology stocks continue to perform strongly with the Nasdaq rallying close to 3% over the same period.

Comments by Federal Reserve Chair Jerome Powell appeared to suggest support for a pause at the upcoming monetary policy meeting in June. He remarked that developments in the banking sector could mean that rates don’t need to rise as high to slow the economy. He also commented that with policy settings becoming more restrictive, the risks of doing too much versus doing too little are becoming more balanced. Market pricing continues to point towards a pause at the June meeting.

US treasury yields retraced sharply following Powell’s comments. In a whipsaw session, 2-year US Treasury yields initially moved higher on Friday evening, continuing the trend from last week, before reversing sharply from the 4.35% yield highs to end the week near 4.25%, albeit some 25bps higher from Mondays open. 10-year Treasuries exhibited similar volatility and ended the week at 3.67%, closing above the top of the range which has been in place over the past 2 months. Yields on global bonds have been moving steadily higher over the past week with economic data remaining resilient for the most part and concerns about the tail risks associated with US banking sector stress receding.

After four consecutive days of gains, The US Dollar lost momentum into the weekly close following Powell’s comments and the associated pullback in US interest rates. USD/JPY, which is one of the more sensitive currencies to US interest rates, fell sharply from 138.60 to 137.60 before recovering. Amid the softer US dollar backdrop, NZD/USD steadily climbed throughout the offshore session, briefly moving above 0.6300, which was a big-figure higher than the weekly lows near 0.6200, before closing near 0.6280.

The NZD was the best performing developed market currency by some margin over the course of last week with widening yield differentials seemingly offering support. Indeed, the NZ trade weighted index gained 1.5% and is moving up towards the 2023 highs reached back in January.  Meanwhile, the NZD continued its recent outperformance relative to the AUD with NZD/AUD climbing back above 0.9400 to match the 2023 highs from back in March.

The domestic rates market continued to move higher in yield on Friday amid upward revisions by domestic banks to their forecasts for the peak in the RBNZ official cash rate (OCR). The 2-year swap rate saw a massive repricing which took yields back to the highs from early March, near 5.5%, and rounded out the largest weekly move in over a decade. The move higher in yields was exacerbated on capitulation by speculative accounts that had been positioned for lower yields. The move higher in yields was more pronounced in the front end of the curve which saw yield curve invert back towards historic levels.

The pressure on the open will be for modestly higher rates, with Australian 3 and 10-year bond futures up ~3bps in yield terms on Friday night. In the week ahead the main domestic focus will be Reserve Bank’s Monetary Policy Statement on Wednesday and associated press conference.  In addition, Q1 retail trade report will be released. Globally, the advance PMIs for May are released along with UK inflation data and minutes from the May FOMC meeting.