Federal Reserve Chair Powell signalled the central bank may cut rates in September. US equities made solid gains. The small cap Russell 2000 index advanced almost 4.0%. US treasury yields declined and the curve steepened

There were large moves across financial markets in response to US Federal Reserve Chair Powell’s widely anticipated address at the Jackson Hole economic symposium. Powell signalled the Fed may cut rates in September triggering large gains in equity markets, a rally in treasuries and a sharply weaker US dollar. The S&P closed 1.5% higher and the Russell 2000 index of small cap US equities gained almost 4%. Credit spreads narrowed.

Chair Powell said that with policy in restrictive territory, the shifting balance of risks may warrant adjusting its policy stance. He noted downside risks to employment are rising and that it is reasonable to expect a short-lived impact on prices from tariffs. The speech comes amid unprecedented pressure from the US administration, which if maintained, threatens the Fed’s independence in determining monetary policy.

The market increased the amount of Fed easing priced for this year. There is around 20bp of cuts priced for September FOMC and a total of 54bp by December, compared with 48bp before Powell’s speech. However, recent comments from Fed officials suggest that there is still a range of views on the committee. And there are key data releases in the next month, especially the August labour market report, ahead of the September meeting.

The Congressional Budget Office has released updated estimates for the fiscal impact of tariffs. The announcements so far are forecast to reduce primary deficits by US$3.3 trillion over the period to 2035, while interest payments would fall by an additional US$700 billion. The additional revenue will help offset the fiscal impact of President Trump’s One Big Beautiful Bill, which is projected to increase debt levels by US$4.1 trillion over the period. The CBO noted that the estimates do not include the negative impact from the tariffs on growth.

US treasuries rallied strongly, led by the front end of the curve, as the market incorporated additional easing. 2-year yields declined 10bp to 3.70%. The 3.65%-3.70% region has formed the base of the trading range over the past few months. The treasury curve continued the recent steepening trend with 10-year closing 7bp lower at 4.25%.

The dollar fell sharply following Powell’s speech aligned with the rally in US rates markets. The dollar index declined almost 1% with the gains almost uniformly distributed across the G10 currencies. The US dollar declined to the session lows after President Trump said he will fire Fed Governor Lisa Cook is she doesn’t resign. NZD/USD traded up towards 0.5875, almost fully retracing the losses, from after the RBNZ meeting last week. The NZD was broadly stable on the major crosses.

Japan core CPI, which excludes fresh food and energy, increased 3.4% in July. This was in line with consensus expectations but well above the Bank of Japan’s 2% target. Inflation dynamics suggest the central bank should resume normalising monetary policy. Market pricing implies the policy rate will remain unchanged at the September meeting while there is about a 50% chance of a 25bp hike in October.

RBNZ Chief Economist Paul Conway said the central bank views the recent lull in economic activity as temporary and that policy doesn’t need to be ‘overtly stimulatory’. He noted the economy is expected to recover in response to the current policy settings and the revival in the housing market, and its impact on residential construction, will be a key driver. He also said monetary policy is close to neutral having previously identified a 2.5% to 3.5% range for the OCR which neither curbs nor stimulates demand.

NZ swap ended the local session on Friday 1-2bp higher across the curve largely reacting to higher offshore yields. Government bonds moved higher in yield with further underperformance in the ultra-long part of the curve. 10-year yields increased 3bp to 4.35%. The 10y/30y NZGB curve steepened to 81bp, a new cycle high. Australian 10-year government bond futures are 5bp lower in yield terms since the local close on Friday, which suggests a downward bias for NZ yields on the open.

NZ retail sales for the June quarter are released today in an otherwise quiet regional calendar. Retail sales likely declined set against the backdrop of a weak labour market and slowing population growth. Total electronic card transactions declined in nominal terms in Q2. The German IFO business survey is released later this evening. Expectations amongst businesses have been steadily improving and the advance August reading composite PMI edged higher.