Yesterday appears to have delivered a wakeup moment for the market.
Whilst the Fed did not hike, the outcome of yesterday's FOMC meeting was undeniably hawkish - the target rate will be held at its peak for longer than what the market anticipates given the current and projected performance of the US economy is notably stronger than what was previously forecast.
US equity markets have been firmly offered over the past 24 hours - the S&P500's two day decline exceeding 2.5% whilst the dollar continues to be supported as US bond yields break through key resistance levels.
The yield on the benchmark 10 year bond has ratcheted up to a fresh 16 year high, climbing just short of the 4.50% mark.
On 31 August we commented regarding higher bond yields and the path of the 10-year's yield:
In some cases, higher yields can negatively impact equity valuations as a higher discount rate adversely impacts the value of future earnings. The return on treasuries suddenly becomes more attractive, leading some market participants to rotate out of stocks and into higher yielding bonds.
As the yield on the US 10-year ascended through a key resistance level near 4.35%, jittery equity market bulls exited the market, worried that should the yield extend higher towards 4.50%, a pronounced downside washout would ensue.
The S&P500 is down over 3% for September whilst the Nasdaq's month-to-date decline approaches 5%......the downside washout appears to be unfolding.
Despite the risk-off vibes, the New Zealand dollar has hung tough through Thursday, rebounding from sub-59 US cent levels, gaining close to a quarter-of-a-percent.
Shortly after the release of another rounds of stronger-than-expected US weekly jobless claims data (201K vs 225K, expected), the Kiwi marked overnight lows a few pip below 0.5890. Following Wednesday's aggressive reversal from the 0.5980's and follow through selling into the New York morning, Thursday, NZDUSD looked destined to retest the year-to-date low a pip or so through 0.5860.
The dollar's advance has stalled through the second half of US trade, allowing the Kiwi to recover ~40pips, rebounding back through 0.5940.
Local importers holding out for an NZD bounce - you may be waiting for some time whilst facing the risk the New Zealand dollar and other risk sensitive currencies experience another down surge as the market finally catches up to what the Fed has been touting for some time: additional tightening may be required, the peak fed target rate will likely be held for an extended period, rate cuts aren't likely to occur until early 2H 2024.
The next FOMC meeting is 01 November.
Current market pricing assigns a 30+% probability the target rate is lifted by 25bps to 5.50% - 5.75%, an outcome that 12 FOMC members projected via the release of yesterday's dot plots.
The US labour market remains robust (unemployment remains below 4%), inflation is still uncomfortably above target (core PCE last printing at 4.2% vs the Fed's 2% target), crude oil is setting up to again punch through US$100/barrel.
October's key macroeconomic data events: US jobs report (06 OCT.), CPI (12 OCT.)PCE (27 OCT.) - the outcome of these will determine if the dot plots prove accurate.
The Fed hiking in November spells trouble for risk assets and could set-up a retest of last October's low near 55 US cents.
Shifting our focus back to the past 24 hours, following Wednesday's sizeable downside CPI miss, the Bank of England delivered an on-hold decision, the key takeaways:
- No change: BoE holds the bank rate at 5.25%
- A close decision: 5 to 4 vote split
- Premature to call an end to the tightening cycle
The primary focus for the BoE in determining the path for monetary policy late in the cycle has been services inflation and private sector wage inflation, the former falling below the BoE's forecast following Wednesday's CPI release.
Prior to the release, market pricing assigned an 80+% probability of a 25bps hike whilst a clear consensus of economists backed additional tightening. Clearly, August's CPI data swayed enough MPC members to pivot to an on-hold decision.
Given monthly CPI data can be volatile, impacted by spikes (higher or lower) in the prices of certain baskets, in addition to the persistently uncomfortably elevated level of inflation, it is far too premature to declare the BoE is done.
The pound joined the Australian dollar and the Swiss franc as the three laggards on the G10 leaderboard, CHF claiming the bottom spot as the SNB surprised with no change to its policy rate.
The Kiwi's impressive streak against the pound was extended, NZDGBP logging an intraday gain for the 7th consecutive day, advancing to within a pip or so of 0.4830. Testing the 100-day moving average, it’s the highest the pair has traded since 01 August.
In domestic news from Thursday, 2Q GDP printed at 0.9% QoQ, comfortably surpassing the consensus estimate of 0.5%. In addition, the March quarter was revised higher from -0.1% to 0.0% meaning a technical recession (back-to-back quarters of negative growth) was avoided.
Whilst the upside surprise is unlikely to prompt the BNZ to hike in October, it certainly provides food for thought given the Kiwi economy has notably rebounded from the previous two quarters which may feed through into inflation metrics.
The Kiwi's GDP induced bid was short lived, NZDUSD improving from 0.5920 through 0.5950 before resuming its descent, falling to within a few pips of 59 US cents in the Asian afternoon.
The New Zealand dollar's largest intraday move occurred against its trans-Tasman neighbour, NZDAUD bouncing over half-a-percent, marking intraday highs in the 0.9240's. Choppy, range bound trade has been the order of play for the antipodean cross over the past 4 weeks.
To the day ahead, the Bank of Japan's monetary policy meeting is the headline event. No change the current policy settings of a -0.10% bank rate and the yield curve control cap is the expected outcome. Governor Ueda's comments will be scrutinised for any signals regarding the timing of the next policy tweak.
Its PMI day, S&P Global releasing manufacturing and service sector readings for the UK, eurozone and US economies.
Locally, trade balance data and Westpac's consumer sentiment survey will garner attention but not likely to influence short-term NZD direction.
Things were looking ugly for the Kiwi heading into overnight trade, yesterday as NZDUSD plunged below 59 US cents, however the sellers vanished throughout US trade. Nevertheless, NZDUSD remains susceptible to further downside as the velocity of losses for US equities steps up.
We suspect the Kiwi struggles to maintain a foothold above 0.5900.