Further signs of a de-escalation in the US China trade war provided support to risk sensitive assets ahead of the Federal Reserve’s interest rate decision. There was confirmation of trade talks between the US and China. US Treasury Secretary Scott Bessent and US Trade Representative Jamieson Greer will meet with Chinese officials this weekend in Switzerland. In addition, Chinese officials outlined a range of measures aimed at supporting the economy.
US equity markets advanced ahead of the FOMC. US treasuries yields were little changed, and the US dollar was marginally stronger on the major cross rates with the NZD and AUD relatively weak within G10 currencies.
The US Federal Reserve left rates on hold for a third straight meeting, which was unanimously expected by economists, as FOMC officials continue to wait for more clarity on the outlook for the labour market and inflation. In the accompanying statement, the Fed noted that uncertainty about the outlook has ‘increased further’ and indicated that the risks of higher unemployment and inflation have risen.
The Fed said it would continue to reduce its balance sheet at the reduced pace announced in Mach. The monthly cap on its treasury holdings that can mature without being reinvested was maintained at US$5 billion.
In the press conference, Chair Powell noted that near term measures of inflation expectations have moved up, but most measures of longer-term expectations remain consistent with its 2% inflation target. He also outlined that the central bank is well placed to wait for greater clarity before considering any adjustments to its policy stance. Powell reiterated that the Fed doesn’t need to be in a hurry to adjust rates.
The immediate market reaction was limited. Futures pricing is indicating around a 25% chance of a 25bp cut at the June meeting, little changed from ahead of the release, and a total of ~80bp of easing by the end of the year. US treasury yields dipped to the session lows and the US dollar was marginally weaker, albeit within the confines of the dollar index’s narrow overnight range. The S&P slipped into negative territory.
China's central bank (PBOC) and financial regulators held a briefing to outline policies aimed at supporting the economy given the increasing headwinds from US trade policy. The PBOC announced a 0.5% decrease in the reserve ratio requirement, a 10bp cut to its policy rate to 1.40% and said that it will keep FX, bond and stock markets stable.
PBOC Governor Pan said the latest measures were due to the uncertain outlook for the global economy amid economic fragmentation and trade tensions. The actions demonstrated a willingness by Chinese policymakers to provide additional support to the economy. The Hang Seng China Enterprises Index gapped more than 2% higher at the open but gains faded through the session. The market focus will now turn to the amount of progress in the upcoming trade talks.
The NZ unemployment rate remained steady at 5.1% in Q1, which was below expectations for a rise to 5.3%, due to a lower participation rate. Other details within the labour market report were soft. Full time employment and hours worked have fallen for five consecutive quarters. The weak labour market is contributing to lower wage growth which fell to 2.6% y/y in Q1 from 3.0% in Q4.
The labour market data contributed to lower yields for NZ fixed income in the local session yesterday. The swap curve moved 4bp lower in a largely parallel curve shift. 2-year yields closed at 3.09%, in a continued consolidation near the cycle lows, after the decline at the beginning of April.
There was a marginal outperformance for NZGBs which fell 5bp across the curve.10-year government bonds closed at 4.55%. Australian 10-year bond futures are ~4bp lower in yield terms since the local close yesterday suggesting a downward bias for NZ yields on the open. The weekly government bond tender is scheduled this afternoon. NZ Debt Management will offer the Apr-2029 ($225m), May-2036 ($175m) and May-2051 ($50m) maturities. The 2051 line is being tendered for the first time since February.
There is no domestic or regional data of note today. The Bank of England is widely expected to reduce its policy rate by 25bp to 4.50% with a subset on the committee expected to prefer a larger 50bp cut. The Bank is also likely to reduce its growth and inflation forecasts. The market is fully discounting a 25bp cut and implies a total 100bp of easing by the end of the year. In addition, investors will look for any updates on the Bank’s quantitative tightening program.
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