NZD has solidified the loss seen post the NZ labour market data yesterday; FOMC statement had no surprises; US rates were lower but have bounced back up

The NZD has solidified the loss seen post the NZ labour market data yesterday.  It has been a bit of a whippy session overnight, with a weaker US ISM manufacturing report and the Fed Chair sounding upbeat in the opening statement to his press conference, after a no-surprise FOMC statement. US rates were lower but have bounced back up.

A key market mover overnight was the US ISM manufacturing report, which was much weaker than expected – the index fell to a 2½-year low, with broadly based declines across the key employment, new orders and production components. Uncertainty about trade and tariffs (China as well as with Mexico) were noted amongst the comments. The survey provides a clear message to President Trump to get a trade deal done with China, to prevent a bigger slowdown as we head into the prolonged pre-election period. Earlier, stronger ADP employment raised the possibility of another good payrolls report at the end of the week.

The FOMC made inconsequential tweaks to the previous meeting’s statement and the revision was all about the characterisation of the present economic situation. The Fed noted that "economic activity rose at a solid rate" and acknowledged that core inflation has declined and is running below 2%. Nothing in the outlook paragraph changed, with the Fed remaining reluctant to signal a policy bias and continuing to be “patient” as it decides its next policy move.  For the third time in the past year, the Fed made another cut to the interest rate on excess reserves from 2.40% to 2.35%, but this was simply a technical adjustment to help keep the effective Fed Funds within the 2.25-2.5% target range.

US Treasury rates and the USD fell after the ISM report but the market was understandably reluctant to move too much ahead of the FOMC statement at 6am.  With the “no-surprise” FOMC announcement out of the way, the market was then more comfortable in taking US rates and the USD even lower, but then Fed Chair Powell threw a spanner in the works with some upbeat comments in his press conference.  On inflation he said "We suspect that some transitory factors may be at work. Thus, our baseline view remains that with a strong job market and continued growth, inflation will return to 2 percent over time."

These comments triggered a complete reversal of earlier market pricing. From a low of 2.45%, the US-10 year rate shot back up to 2.51%, to be up slightly for the day. The 2-year rate got down to almost 2.20%, before shooting back up to 2.30%. The USD was down 0.3% for the day, before Powell sent it higher, now up 0.2% for the session on the BBDXY index.

The NZD is trading near its lows for the session around 6620, falling from 0.6660 after Powell opened his mouth.  This solidifies the fall seen after NZ labour market data. The NZ data were mixed, with a lower unemployment rate, but much lower employment growth and wage inflation coming in on the softer side of expectations.  The market put more weight on the weaker  employment trend and non-threatening wage inflation, and saw one less hurdle in the way for RBNZ rate cuts.  OIS pricing for next week’s meeting fell 5bps to 1.60%, taking the probability of a 25bps cut from 40% to 60%. This filtered through the rest of the curve, with the low point in rates down to 1.30% by early next year ,or almost two full rate cuts.  Swap rates were down in the order of 5-7bps across the curve.

For the day, the NZD is lower on all the crosses.  The soft ISM report has seen commodity currencies underperform.  The AUD is down 0.5%, and looking to test key support at 0.70 again.

GBP is one of the better performers, up slightly to 1.3050, after earlier touching 1.31.  There is increased hope of PM May and Labour leader Corbyn edging closer to a Brexit deal, with both sides talking up the prospects for a compromise plan.  May seemed to be warming to some sort of permanent customs union, which Labour has been in favour of.

The Bank of England publishes updated forecasts and policy outlook tonight. Given that the “fog of Brexit” has yet to clear and has only been pushed out to October, we’re unlikely to see the Bank’s policy assessment to change much, although it seems the market is nervous about the BoE adopting a slightly more hawkish stance.  If not for Brexit, with inflation near target and the economy performing fine despite the Brexit uncertainty the BoE would be cranking up rates.

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