Markets continue to reverberate after Fed Chair Powell’s hawkish comments after the FOMC meeting yesterday. Equities attempted to recover lost ground, but the S&P500 index is back to flat for the day. The 10-year rate has reversed a lot of yesterday’s rise, but the curve continues to flatten as short rates lift further. The USD remains in the ascendency, sending the NZD below 0.66 to a fresh 15-month low and the AUD showing an even larger percentage decline.
Soon after we went to press yesterday, the Fed’s policy statement met expectations, keeping its telegraphed winddown of QE by early March and, with inflation well above 2 percent and a strong labour market, the Committee expects it will “soon” be appropriate to raise the target range for the federal funds rate. However, market reaction was influenced by Fed Chair Powell’s hawkish tone at the following press conference. He said that the Fed was of mind to raise rates at the March meeting and he highlighted how this cycle was very different from the previous one, with a higher starting point of inflation, the tighter labour market and growth running above trend. The implication was that the Fed was determined to use its interest rate tool to bring inflation down and it had plenty of work to do.
There was an accompanying Statement on principles for reducing the size of the Fed’s balance sheet. It noted the planned approach for “significantly” reducing the size, and in the press conference Powell indicated discussions would continue over the next couple of meetings, suggesting a mid-year start at the earliest.
Powell’s hawkish tone drove interest rates higher across the curve, with the 2-year rate up about 14bps in the hour or so after he spoke and 10bps for the 10-year rate. This supported USD strength and drove the S&P500 down 1½% into the close.
There has been some reversal of the interest rate move, but only at the long end of the curve and, while stocks attempted to recover, they have fallen back down. The USD has continued to push higher.
For the day, the yield curve has flattened a lot further, in the order of 9bps, with the 2-year rate up 2bps to 1.17% and the 10-year rate down 7bps to 1.79%. Since the FOMC meeting, an extra rate hike for 2022 has been priced in, with the market pricing in nearly 5 rate hikes, compared to 4 previously. Around 30bps is priced for the March meeting, suggesting some chance of a 50bps hike, something Powell wasn’t willing to rule out. But a run of weaker Omicron-affected data ahead of that meeting is unlikely to see the rate hike cycle kick off with a 50bps move in our view.
Powell’s hawkish talk and accompanying lift in short rates has provided significant broad-based support for the USD, with the BBDXY index up 0.7% for the day and now close to the peak seen late last year. Since this time yesterday, the AUD has been the hardest hit, down 1.9% to 0.7030 while the NZD is down 1.6% to 0.6580, printing fresh 15-month lows as we type. The currency has broken below the downward trend channel in place for almost a year and the next level of support is 0.6500. A chunky move in CNY, with USD/CNY up 0.75%, has added to weaker sentiment for the NZD and AUD.
No major has escaped the mighty force of the USD, with falls in EUR, CAD, JPY and GBP all in the order of 0.9-1.3% over the past 24 hours. The underperformance of the NZD sees all NZD crosses modestly lower, apart from a small lift in NZD/AUD back to around the 0.9350 mark.
Economic data releases have been a sideshow to the post FOMC market movements. US GDP rose an annualised 6.9% in Q4, suggesting strong growth ahead of the hit from Omicron and seemingly much higher than consensus, but as we noted yesterday that estimate pre-dated the strong inventories figures released. Indeed, inventories contributed 4.9 percentage points of GDP. Real final sales to domestic purchasers rose by just 1.9% annualised. The inflation impulse remained strong, with the core PCE deflator rising an annualised 4.9%, as expected. With the hit to Omicron, GDP growth is set for a very weak Q1.
Other data show weak pending home sales in December and weaker headline durable goods orders, although dragged down by aircraft orders. Core orders rose 0.4%, continuing the robust trend for business investment. Weekly initial jobless claims figures fell 30k to 260k, of some relief, but still running higher than pre-Omicron, consistent with weaker payrolls growth during this period.
Yesterday, NZ’s CPI rose by 5.9% y/y in Q4, the highest rate in more than 31 years although not breaking the 6% mark as some feared, but this is likely next quarter. Core inflation measures were very strong as well, ranging from as low as 3.2% – the RBNZ’s smooth sectoral factor model estimate – to as high as 5.4% for the CPI ex food and energy measure. The last time the sectoral factor model estimate was rising above 3% was during the 2006-07 period when the cash rate was on its way to a peak of 8.25%. No one is suggesting that the cash rate will need to get anywhere near that high this cycle, but at a current OCR of 0.75%, the RBNZ has plenty of work to do on monetary policy.
The NZ rates market had a whippy session. The 2-year swap rate rose into the CPI release to 2.50%, with the tailwind of rising global rates, fell after the CPI wasn’t as large as feared, before lifting again in the afternoon to be up 5bps for the day at 2.05%. There was a parallel shift across much of the curve with 5 and 10 year rates also up 5bps for the day. NZGBs showed a similar move, with rates up 4-6bps across the curve.
On the economic calendar NZ consumer confidence today will be followed by some key US data including the quarterly employment cost index. This is a clean measure of wage inflation and has been running hot of late, an important input for the Fed’s monetary policy decisions.
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