Risk sentiment recovered, with equities reversing the post-FOMC selloff. US yields fell and the curve flattened, helped by an initial dip in oil prices and stronger gilts

The dip in risk-sensitive assets after Fed Chair Warsh’s post-FOMC press conference unwound through Asian trading yesterday and extended overnight. The S&P 500 gained about 1%, while the Nasdaq outperformed and chipmakers rose around 3%. Treasury yields fell from recent highs, with the 10-year yield back below 5%, while the US dollar was broadly stable. Brent crude briefly fell toward $102 on signs Saudi Arabia was restoring capacity on its East-West pipeline, before rebounding after President Trump said he was approaching a major crossroads on the Iran conflict.

There was little data to give the market fresh direction. US initial jobless claims were steady at a low level, with few signs of a change in trend. A decline in continuing claims suggests the unemployment rate is more likely to remain at 4.1% than drift higher in the near term. Market pricing implies around a 50% chance of a follow-up hike at the October FOMC, with about 32bp of tightening priced by year-end.

The Bank of England held rates steady at 3.75%, in line with expectations. The voting split remained 6–3, with three MPC members favouring a 25bp hike. The Bank sounded more concerned about inflation and maintained guidance that it stands ready to act as necessary to ensure inflation returns sustainably to the 2% target over the medium term. It also overhauled its quantitative tightening programme, pausing all bond sales until April and ending sales of long-dated bonds. The measures supported a rally across the gilt curve, led by the long end, while the pound fell after the decision.

US Treasury yields declined and the curve flattened, as lower oil prices and gains in UK government bonds reinforced the recovery in risk sentiment after the Federal Reserve’s rate hike and renewed commitment to returning inflation to target. The 10-year yield fell to 4.95%, around 5bp below the NZ afternoon level, while the 2s10s curve flattened to 26bp, matching its June low. Elevated real yields did little to support demand at the US 10-year TIPS auction, which tailed by 2bp.

Currency markets were broadly stable, with the US dollar index confined to a narrow range. The pound fell after the BoE decision and was the weakest G10 currency since the NZ close. NZD/USD recovered toward 0.5750 offshore, partially reversing its sharp post-FOMC decline. Net moves across the NZD crosses were modest, with the only notable move in NZD/GBP, which rose toward 0.4295.

NZ Q2 GDP rose 0.2%, broadly in line with expectations, but upward revisions to earlier data meant annual growth lifted to 2.6%, comfortably above the RBNZ's September MPS forecast. Export activity remained the key driver of growth, while construction also made a stronger-than-expected contribution. Offsetting this, discretionary consumer spending remained subdued, reflecting ongoing pressure on household budgets. We have reinstated a 25bp October OCR hike and now expect 25bp increases at sequential meetings to a 3.75% peak.

NZ fixed income markets showed limited reaction to the GDP data. The domestic curve flattened in the local session yesterday, with 2-year rates closing 2bp higher at 4.02%, near cycle highs, while 10-year rates fell 2bp to 4.70%, reflecting the firmer tone in offshore markets. The weekly government bond tender attracted decent demand with NZ$1.9 billion in bids for the NZ$450 million offered across three nominal maturities. All lines cleared below prevailing market mids.

August Selected Prices are released today and will offer the latest read on Q3 inflation, with resurgent fuel prices expected to show through and add upside risk to CPI forecasts. RBA officials, including Governor Bullock, appear before the House of Representatives. Japan’s CPI is also due ahead of the BoJ decision, where a 25bp hike is widely expected, taking the policy rate to 1.25%. Governor Ueda’s guidance on the pace of further normalisation will be the key focus.

Stuart Ritson is a senior Markets Strategist at BNZ Markets.