By Stuart Ritson*
Global asset markets were generally subdued as investors looked ahead to the US Federal Reserve rate decision which will help frame the outlook for policy easing this year. The S&P recovered from an earlier dip to be marginally higher in afternoon trade with similar small moves across other major global indices. The Nikkei registered a 0.7% gain after Tuesday's widely anticipated Bank of Japan meeting. Treasury yields drifted lower and the US dollar advanced.
The Bank of Japan (BOJ) raised interest rates for the first time since 2007, becoming the last central bank to exit negative interest rate policy. The BOJ shifted to a new overnight policy rate which it will keep in a 0-0.1% range, discontinued its yield curve control program and ended purchases of exchange-traded funds. However, it will continue to purchase government bonds to ensure any move higher in yields remains gradual. The policy adjustment was widely anticipated. Japanese Government Bond (JGB) yields ended marginally lower while the yen weakened.
In the US, building permits and housing starts for February exceeded median expectations. Although likely partly weather related, easing mortgage rates and weak inventory for existing homes for sale contributed to demand. The data suggests the underlying trend is improving, and aligns with the pickup in homebuilder sentiment, which turned positive in March.
US treasury yields drifted lower across the curve. 2-year yields retraced marginally from the 2024 highs falling 3 basis points (bps) to 4.70%. There was a similar move in 10-year treasuries – down 2bps to 4.30% - in quiet market conditions with many investors sidelined ahead of the Federal Reserve's Federal Open Market Committee (FOMC). The US$13 billion 20-year auction saw decent demand with yields near the 2024 highs likely a factor.
The yen was the main mover in currency markets falling more than 1% against the US dollar compared with pre-BOJ levels. Comments by Governor Ueda, who said it’s important to keep monetary conditions accommodative, weighted on the Yen. The US Dollar was broadly stronger against G10 currencies. Softer than expected inflation data in Canada, increased market pricing for a June cut by the Bank of Canada and contributed to Canadian dollar weakness.
NZ dollar-US dollar (NZD/USD) extended the move from the local session Tuesday and made new 2024 lows towards 0.6035. There didn’t appear to be any independent catalyst for the NZD move. However, sentiment may have been impacted by the Treasury’s commentary that said NZ was in a ‘severe’ economic downturn. The NZD is weaker on the major crosses except NZD/Japanese yen. NZD/Australian dollar retraced gains made Tuesday following the Reserve Bank of Australia (RBA) meeting, where rates were on hold as expected, and the bank removed any references to possible future increases.
NZ fixed interest markets ended the local session Tuesday lower in yield with a modest steepening bias. 10- year NZ Government Bond yields fell 2bps to 4.67%. Bonds outperformed swaps with rates in the 10-year sector unchanged on the day. Australian 3 and 10-year bond futures are largely unchanged overnight following the post-RBA drop in yields.
NZ fourth quarter (Q4) current account data is released Wednesday and is expected to continue narrowing as a proportion of GDP. The FOMC is unanimously expected to leave rates on hold Thursday morning (NZT) with the focus on updated economic projections and Chair Powell’s press conference. Investors will look to the ‘dot plot’ and the amount of rate cuts forecast for this year.
Another key focus is any change in policymakers’ long run view of the fed funds rate. The median has been stable at 2.5% since 2019. Officials are also likely to discuss the Fed’s balance sheet though an official announcement about the tapering of quantitative tightening is not expected at this meeting.
The overnight bi-monthly GlobalDairyTrade (GDT) auction saw a 2.8% overall price drop, with whole milk powder down 4.2%.
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*Stuart Ritson is BNZ's Senior Interest Rate Strategist. David Chaston will return on Thursday.
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