More pushback from Fed officials on market pricing for significantly easier monetary policy next year, but market shows little reaction in Fed Funds market; US Treasury yields push higher, led by long end; oil prices continue to recover

US Treasury yields have pushed a little higher against the backdrop of Fed officials attempting to hose down market expectations for early and significant rate cuts next year. This hasn’t perturbed equity investors, with further gains in US equities. The NZD is flat around 0.62 while the yen has underperformed ahead of the BoJ policy announcement later this afternoon.

Following NY Fed President Williams’ attempt on Friday to row back market expectations regarding Fed rate cuts next year, Cleveland Fed President Mester told the FT that the market had gotten “a little bit ahead” by pencilling in early interest rate cuts, “the next phase is not when to reduce rates, even though that’s where markets are at…it’s about how long do we need monetary policy to remain restrictive in order to be assured that inflation is on that sustainable and timely path back to 2%”. Chicago Fed President Goolsbee told CNBC he was confused with the market’s reaction to the Fed’s policy update last week.

At the end of the day, the dataflow will determine the timing and scale of Fed rate cuts next year and market pricing for the Fed Funds rate is little changed, with still a high chance that the rate cut cycle could commence from March (19bps priced) and some 140bps of cuts priced through 2024. US Treasury yields have pushed a little higher, led by the long end, with the 2-year rate currently up 1bp from last week’s close and the 10-year rate up 4bps to 3.95%. Germany’s 10-year rate is up 6bps to 2.08%, after falling to a 9-month low at the end of last week.

Not helping the bond market, oil prices show further signs of recovery from recent depths, with a gain of about 2½%, seeing WTI over USD73 per barrel and Brent crude over USD78, both at two-week highs. There is a hint of geopolitical risk affecting the market as ships avoid transiting the Red Sea for fear of being attacked.

In economic news, Germany’s IFO survey showed the expectations component slipping just under a point to 84.3, against the consensus for a small lift, while the current assessment component did show a modest lift. The data suggest no forthcoming recovery from the current recessionary-like conditions. US homebuilder sentiment rose for the first time in five months, with the NAHB index rising 3 points to 37, with the NAHB chief economist noting the passing of the peak in mortgage rates.

Currencies have been mostly well-contained, although against a backdrop of higher global rates the yen has underperformed, with USD/JPY up 0.5% to around 143. This might also reflect some nerves heading into the BoJ’s meeting later today. The NZD is currently just over 0.62, little changed form last week’s close, after meeting some resistance around 0.6250, as it did at the end of last week. The AUD is trading just under 0.67 and NZD/AUD is flat at 0.9270.

Domestic rates were modestly lower yesterday, driven by global forces. NZGB rates fell 3-5bps across most of the curve, with the 10-year rate closing at a five-month low of 4.52%. Swap rates were down 2-5bps. There was no reaction to domestic data. Westpac’s quarterly consumer confidence index rose to 88.9 in Q4, its highest level since early last year, but still well below average and not much higher than the GFC lows, consistent with weak consumer spending continuing. The performance of services index nudged back above the 50-mark, to 51.2. Combined with the weak PMI, the composite index suggests the economy has continued to struggle in Q4.

In the day ahead, NZ trade data and the ANZ business outlook survey are released. There will be keen interest in the BoJ’s policy announcement. The Bank is widely expected to leave policy unchanged, but there is increasing pressure on the Bank to adjust policy. There is an outside chance of a surprise move to lift its short-term policy rate out of negative territory, but this is seen to be more likely early in 2024. A shock move at this meeting would trigger significant yen strength. US housing starts and building permits are released tonight as well as Canadian CPI data.

This is the last BNZ Markets Today for the year. Regular publication will resume in mid-January. We thank you for your readership over the year and hope you have a good break during the festive season.