Against a backdrop of weaker risk appetite, commodity currencies have underperformed over the past 24 hours, with the NZD trading at a fresh low for the year before recovering. Trading has been whippy over the past hour or two in response to a speech by Fed Chair Powell, with a fickle market responding to both dovish and hawkish soundbites. The US 10-year rate traded at a fresh 16-year high of 4.99% but the USD has been broadly weaker overnight.
Market conditions were whippy this morning as Fed Chair Powell gave a speech to the Economic Club of New York and the headlines rolled down the screen. His prepared remarks were consistent with the message delivered at the September FOMC meeting, as he commented “given the uncertainties and risks, and how far we have come, the committee is proceeding carefully”. On further tightening he said “we are attentive to recent data showing the resilience of economic growth and demand for labour…additional evidence of persistently above-trend growth, or that tightness in the labour market is no longer easing, could put further progress on inflation at risk and could warrant further tightening of monetary policy”.
His speech was also consistent with recent remarks from his colleagues as he noted the recent significant tightening of financial conditions and “persistent changes” in these “can have implications for monetary policy”.
The consistent message from what we’ve been hearing saw a relief rally in bonds and a weaker USD, however, in the Q&A his comments came across as more hawkish. He said the evidence is that policy is not too tight right now…either the neutral rate has risen, or rates have not been high enough for long enough. He added that the risk is still high inflation and business leaders had told him the economy remains strong. This saw rates and the USD climb back higher. But now that move had faded somewhat.
After trading down to 4.89% and as high as 4.99% - a fresh 16-year high - the 10-year Treasury yield currently sits at 4.96%, not much different from the NZ close. The 2-year rate is down 4bps on the day, making the curve steeper. The market sees little chance of the Fed hiking in two weeks, and a slightly reduced chance of another rate hike over the subsequent couple of meetings, with that probability now pegged at about a 40% chance.
After President Biden’s trip to Israel, risk appetite seemed to fall, with US diplomatic efforts not providing the market enough confidence that the war will be contained. In latest developments, the Egypt-Gaza border will open today, allowing aid into Gaza, however, Israel is continuing to prepare for significant ground operations in Gaza against Hamas. In Israel’s North, Hezbollah have been firing rockets from Lebanon.
Weaker risk sentiment yesterday drove a stronger USD and the NZD fell to a fresh low of 0.5816 last night. However, much of that reversed course and, despite a blip higher after a hawkish soundbite from Powell, the USD is broadly weaker, seeing the NZD recover back to 0.5850. The AUD saw some additional weakness after a softer than expected employment print but has recovered by more than the NZD. There was evident support for the AUD just below 0.63 and it has recovered to 0.6340, with NZD/AUD grinding down to 0.9230.
European currencies have outperformed, with EUR recovering to 1.06 and NZD/EUR down to 0.5525. After trading below 0.48 last night, NZD/GBP has recovered a little and NZD/JPY has recovered to 87.7 after grinding lower yesterday.
Ahead of Powell speaking, US economic data were mixed, but not market moving. Initial jobless claims to fell to 198k last week to their lowest level since January, continuing to come in lower than expectations, providing no evidence of any uptick in people losing their jobs. However, continuing claims rose to 1.73m, the highest level since July, suggesting those losing jobs may be having trouble finding new ones. Existing home sales fell 2% in September to a 13-year low and have fallen for 18 of the past 20 months, with the now familiar story of those locked into low mortgage rates of 5% or less unwilling to move as that would entail a refinancing of the mortgage to 7-8%. This shortage of house sales is contributing to inflation via a lack of supply, and demand for new housing for new purchasers.
The domestic rates market felt the full force of higher global rates but with some anchoring of NZ monetary policy expectations meaning that this was reflected in steeper curves, with long-term rates pushing up to levels not seen in more than a decade. The 2-year swap rate closed 4bps higher at 5.67% and the 10-year rate rose 12bps to 5.40%. The 10-year NZGB rose 11bps to 5.57%. NZDM postponed the bond tender to today, after encountering technical difficulties with the YieldBroker tendering system.
In the day ahead, after NZ trade figures, Japan CPI figures are expected to edge lower from well above-target rates. Tonight sees the release of retail sales data for the UK and Canada. The US is quiet apart from a barrage of Fed speakers.
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