Lift in US Treasury yields during Asian session extended overnight; rates up 10-13bps across the curve for the day. Fed Governor Waller argues that, when the timing is right, the Fed Funds rate should be "lowered mechanically and carefully"

US Treasury yields are much higher on the day, with the lift during Asia extended and sustained overnight following comments from Fed Governor Waller, who pushed back against market expectations, arguing for a “careful” rather than rapid easing in policy. The USD is broadly stronger, seeing NZD extend recent losses to below 0.6140. Equity markets are modestly weaker.

During the Asia trading session there were some nerves about what respected Fed Governor Waller would say overnight on monetary policy, resulting in a modest lift in Treasury yields and a stronger USD. Sentiment might also have been affected by Donald Trump’s convincing victory in Iowa. Trump took one small step towards becoming the next US President, with a commanding win in the first Republican caucus, as the polls suggested. The breakdown of voting showed strong wins across almost all demographics, which highlighted his widespread support amongst Republicans, and he more than doubled the widest margin of victory in the State, an impressive result.

Overnight, Fed Governor Waller said “I am becoming more confident that we are within striking distance of achieving a sustainable level of 2% PCE inflation”, which will allow rate cuts this year. But going against current market expectations for an early start to the easing cycle and more than six rate cuts priced for this year, he suggested “when the time is right to begin lowering rates, I believe it can and should be lowered mechanically and carefully…with economic activity and labour markets in good shape and inflation coming down gradually to 2%, I see no reason to move as quickly or cut as rapidly as in the past.”

US Treasury yields are currently up 10-13bps across the curve, with a steepening bias, taking the 10-year rate to 4.07%, towards its high for the year. Expectations for a rate cut as soon as March has been pared back down to 17bps. At the end of the day, the data will determine policy actions and there are still two more CPI prints ahead of that meeting.

In economic news, the US empire manufacturing survey, which measures manufacturing activity in New York, showed business conditions slumping to minus 43.7, its lowest level since May 2020, against expectations of a lift to minus 5.0%. The series is volatile and the improvement in the six-month outlook to 18.8 negated the shocking headline figure.

UK labour market data showed slower wage inflation, with wages excluding bonuses rising by 6.6% y/y in the three months to November, as expected, while the headline figure showed an even larger drop. While further signs of slower wage inflation alongside the recent sharp drop in CPI inflation support calls for easier BoE monetary policy, there was little change in the market’s projected rate path. However, UK gilts showed little change in rates on the day, against the backdrop of much higher Treasury yields.

Canada annual CPI inflation lifted to 3.4% y/y, as expected, but the core measures were 0.3% higher than expected, with the average of the trim and median at 3.65%. This saw the market push back BoC rate cut expectations, a 13bps lift in Canada’s 2-year rate, a greater move than seen elsewhere, and support for CAD, showing an insignificant fall against the strong USD overnight.

On that note, the USD shows broadly based gains for the day, with strength during the NZ trading session extending overnight, driven by higher US rates against more modest moves seen across Europe. The DXY index is up a chunky 0.9% for the day., The NZD is currently trading near its low for the day below 0.6140. Ditto for the AUD, which is below 0.6590. NZD crosses are flat to modestly lower.

The overnight GDT dairy auction showed a 2.3% lift in the price index, continuing its upward trend, with the index now up 25% from the mid-August low and up 3% on an annual basis. Whole milk powder prices rose 1.7% while skim milk powder rose 1.2%.

The domestic rates market saw higher yields, driven by global forces, with NZGBs up 3-5 bps and swaps up about 3bps. There was little reaction to the quarterly survey of business opinion, which showed a sharp lift in confidence and activity indicators, as indicated by the timelier ANZ business outlook survey, reflecting the election of a more business-friendly government. The value-add of the survey was further signs of disinflationary pressure in the economy, with the selling price indicator falling to +37%, now only modestly above the long-term average, while finding labour has become outright easy, the data portending a sharp lift in the unemployment rate.

In the day ahead, after NZ electronic card transactions data are released this morning, top-tier releases include China activity data, UK CPI and US retail sales. China Q4 GDP is expected to print at 5.3% y/y and 5.2% on an annual average basis, surpassing the government’s 5% target. Premier Li said in Davos overnight that the economy grew around 5.2%, meaning the result will be in line with market expectations. Annual inflation in the UK is expected to show a further drop, with the core figure down to 4.9% y/y. US retail sales are expected to show a modest lift for the headline and core figures.