Falling bond yields, dollar weakness, stronger risk sensitive assets……this mix prevailed through Tuesday's sessions as multiple Fed Governors shared their latest thoughts on the US economy, inflation and the potential path for the Fed funds target rate through the first half of 2024.
The final FOMC meeting for the year will be held on 12-13 December.
Fed Chair Powell and his colleagues increasingly looked to have delivered the final rate hike of this cycle on 26 July given the observance of disinflationary forces and a labour market that whilst still tight, has modestly cooled through the second half of the year.
Fed Governors and FOMC voters Michelle Bowan, Austan Goolsbee and Christopher Waller participated in a busy day of Fedspeak with the latter inducing the more pronounced market reaction.
The yield on the benchmark 10-year note fell to a fresh 2-month low as Waller delivered his prepared remarks, falling through 3.34%. Six weeks ago, the 10-year yield ripped to a 16-year high through 5.00% as a run of strong third quarter macroeconomic data suggested that additional monetary tightening may be required to return inflation to the Fed's 2% target.
The USD dollar has suffered from the 10-year's ~70bps reversal through late October and November, the dollar index (DXY), crunched over 4% from its 01 November peak.
The risk sensitive New Zealand and Australian dollars have outperformed, producing significant bullish outcomes this week - the antipodeans breaking above their respective 200-day moving averages for the first time in four months.
Mostly ranging between 0.6080 and 0.6110 through Asian and European trade, NZDUSD was catapulted through the late New York morning as Waller delivered his speech titled Something Appears to Be Giving.
Following last month's speech, titled Something's Got to Give, Waller commented at the American Enterprise Institute event in Washington:
I am encouraged by what we have learned in the past few weeks—something appears to be giving, and it's the pace of the economy. Data for October indicated an easing in economic activity, and forecasts for the fourth quarter show the kind of moderation that is more in keeping with progress on lowering inflation.
Regarding current policy settings, Waller shared: …..I am increasingly confident that policy is currently well positioned to slow the economy and get inflation back to 2 percent.
A prominent hawk, the tone of the Waller' speech, in some respects, was notably dovish, the market clearly receiving it as further evidence the Fed's tightening cycle is done, in turn predicting rate cuts to commence in late 1H, 2024.
The Kiwi climbed from near 61 US cents to mark Tuesday's intraday highs a few pips shy of 0.6150, its highest level since early August.
Referencing the July to October NZDUSD sell-off, having cleared the mid-point (0.6092) of this range on Monday, the next upside hurdle presents at 0.6168, the 61.8% Fibonacci retracement.
Having leapt higher by over 4% during the past 11 trading days, the Kiwi has entered technical overbought levels….it would not surprise to see topside momentum evaporate around the 61.8% Fib level.
Waller did caution it is too premature to declare victory over inflation, further commenting: While I am encouraged by the early signs of moderating economic activity in the fourth quarter based on the data in hand, inflation is still too high, and it is too early to say whether the slowing we are seeing will be sustained.
Next week's US employment report and the November CPI data (12 DEC.) will provide critical evidence as to a further slowing in economic activity.
In other news from Tuesday, retail sales across the Tasman have fallen for the first time in four months. Printing at -0.2% (vs +0.1%, expected) household spending in Australia has cooled following a spike induced by one-off events such as the FIFA Women's World Cup.
Considering still elevated levels of inflation, real retail sales (vs nominal) remain negative. Further adjusting for the recent spike in net migration, real per capita retail sales are down by around 4% year-on-year.
Typically, falling per capita retail sales would lead to lower inflation, however this has not been the case for 2023 as rents continue to climb and consumers pay more for a broad mix of services. At 5.2%, the RBA's preferred inflation gauge - the trimmed mean measure of core inflation remains uncomfortably high.
The RBA will be hoping for a soft outcome for today's monthly CPI data, expected to fall from 5.6% in September to 5.2%.
The Kiwi continues to range trade against the Aussie, chopping around in the low to mid 0.92's.
We’re likely to observe lively NZDAUD price action today as the RBNZ interest rate decision joins the AUS CPI data as a significant volatility inducing event.
Given the on-hold decision is a foregone conclusion, the focus will be on the accompanying statement and forecasts and whether the RBNZ pushes back against market pricing that currently assigns three 25bps cuts for next year.
Given last quarter's downside inflation miss and notable cooling in the labour market, the RBNZ is likely to strike a more dovish tone relative to the past few months.
Key offshore events for Wednesday include CPI for Germany and the next update for third quarter US GDP.
Given the Kiwi's ascent into overbought territory and the potential for the RBNZ to deliver a dovish on-hold decision/statement/forecasts we suspect NZDUSD may pull back through 60 US cents.