Fed Chair Powell’s speech didn't provide fresh information on the policy outlook. US advance PMIs showed economic activity is holding up well. PMI readings mixed for Europeans

Global asset markets were largely stable overnight with Federal Reserve Chair Powell’s first speech since the FOMC last week providing few fresh clues on the outlook for monetary policy. Major US stock indices are lower and consolidating after the recent run up to record highs. The Euro Stoxx gained 0.6% while major Asian indices were mixed. Global government bond markets were little changed overall while the US dollar was softer at the margin against G10 currencies.

US advance PMIs for September showed economic activity is holding up well. The services index retraced to 53.9 from 54.4, which was close to the consensus estimate, and remains at levels consistent with a healthy expansion. The manufacturing PMI fell to 52.0 from 53.0. The output prices index within the manufacturing survey, fell to the lowest level since the start of the year, which suggests producers are absorbing a decent portion of the tariffs.

Powell’s prepared remarks noted the conflict in achieving the Fed’s dual mandate role given that near-term risks to inflation are tilted to the upside and risks to employment to the downside. He characterised policy settings as ‘modestly’ restrictive and said policymakers faced a ‘challenging situation’ in deciding whether to prioritise fighting inflation or protecting jobs.

Separately Fed Governor Bowman, who voted with the majority for a 25bp cut, said officials need to act decisively to bring down rates as the labour market weakens. The market is pricing 22bp of easing for the October FOMC and a total of 44bp by the end of the year and was little changed in response to the comments from policy makers and the PMI data.

The sell-off in US treasuries since the FOMC appears to have stalled with yields 2-4bp lower across the yield curve with a curve flattening bias. The US$69 billion 2-year auction cleared near prevailing market levels despite tepid demand from investors.

The Eurozone PMI data presented contrasting views for the manufacturing and services sectors. The manufacturing index dipped to 49.5, but the services reading advanced to 51.4, taking the composite to a 16-month high. The headline index masks regional dispersion, as a rebound in Germany offset a contraction in France, where political instability is weighing on demand. PMIs were weaker than the consensus estimate in the UK. 10-year bunds closed unchanged at 2.75% while 10-year gilt yields declined 3bp to 4.68%.

Absolute moves across G10 currencies were small in offshore trade. The pound fell immediately after the soft PMI readings but recovered to be little changed. NZD/USD was confined to a narrow range and is consolidating above the 200-day moving average after sharp post-GDP selloff last week.

It was a quiet session for NZ fixed income in the local session yesterday. Swap rates closed 1-2bp lower across the curve with 2- and 5-year rates remaining near the cycle lows. The market looks ahead to the expected announcement of the new RBNZ governor by Finance Minister Willis this afternoon. Bloomberg reported yesterday that the incoming Governor will be a woman and an international candidate.

The belly of the NZ government bond curve outperformed at the margin. 5-year bonds rallied 3bp while 10-year bond and longer closed 1bp lower. Australian 10-year government bond futures are 3bp lower in yield terms since the local close yesterday, which suggests lower NZ yields on the open.

There is no domestic data today. While not market moving, the Treasury will release the Long-term Fiscal Statement focused on dynamics over coming decades. The monthly CPI indicator in Australia is expected to pick up marginally to 2.9% compared with 2.8% in July which is broadly in line with the Reserve Bank of Australia’s expectations. The IFO is released in Germany.

Stuart Ritson is the Senior Interest Rate Strategist at BNZ Markets.