There were small net changes across global asset markets ahead of the US Federal Reserve’s rate decision this morning. US equity indices were marginally higher, and treasury yields increased 2-3bp across the curve. An initial advance for the US dollar index faded leaving major FX pairings little changed. Commodity currencies including the AUD and NZD made small gains, alongside the Canadian Dollar, with the Bank of Canada rate cut having little impact. Copper prices hit a record high in London amid optimism on US-China trade talks and challenging supply dynamics.
The FOMC reduced rates for the second consecutive meeting. The 25bp cut was in line with economist forecasts and takes the upper bound for the Fed Funds Rate to 4.0%. The move was fully discounted by market pricing. The decision was not unanimous with a 10-1-1 split. Governor Miran again dissented in favour of a 50bp cut, while Kansas Fed President Schmid preferred not to cut rates, having supported the previous reduction in September. Policy makers repeated concerns about the labour market. The central bank characterised economic growth as moderate and noted inflation has moved up since earlier in the year and remains somewhat elevated.
The FOMC also announced that quantitative tightening (QT) will end on 1 December. The run-off of treasuries from the Fed’s balance sheet, which is currently capped at US$5 billion per month, will conclude amid increasing signs that bank reserves have transitioned from abundant to ample. An announcement on the end of QT was anticipated by the market.
In the accompanying press conference, Fed Chair Powell said the labour market appears to be gradually cooling and that the downside risks to employment appear to have risen. He also noted that inflation is somewhat elevated and repeated that short-lived tariff inflation is a reasonable base case. He said a December rate cut is ‘far from’ a forgone conclusion.
There was little immediate market reaction to the announcement. US treasury yields pushed to the session highs after Powell’s comment about the potential for a December cut. The US dollar gained alongside higher treasury yields.
The Bank of Canada reduced its benchmark overnight rate by 25bp to 2.25% which was largely anticipated by market pricing and economists. The central bank reduced its growth forecasts as it sees damage from US tariffs persisting. It signalled that policy settings are ‘about right’ and pushed back on expectations for further easing unless the outlook changes. The market is pricing around 10bp of easing by the April next year.
Australian Q3 CPI came in above the consensus estimate and contributed to a further reduction of RBA easing priced by the market. The trimmed mean increased 1.0% in the September quarter, above the 0.8% estimate, and materially higher than the RBA’s 0.6% forecast from August. The market was pricing around 10bp of easing for the 4 November meeting, but this has been reduced to almost flat. Labour market data and Q3 GDP would need to be particularly weak to being a December rate cut back into play.
The post-CPI sell-off in Australian rates spilled over to NZ in the local session yesterday. Yields closed 3-5bp higher across the swap curve with a flattening bias. Market pricing for the terminal Official Cash Rate has increased to 2.15%. The retracement off the yield lows appears to be contributing to the unwinding of speculative received positions. 2-year rates closed 5bp higher at 2.58% and are now 14bp above the cycle low. The 2y/10y curve flattened to +105bp. There was similar price action in government bonds. 10-year yields closed 4bp higher at 4.05%.
NZ Debt Management announced yesterday it will undertake a tap syndication of the May-2036 nominal bond before calendar year end. We think a mid-November transaction is likely. There will be NZ$450 million of bonds offered in the weekly tender today split across the May-30 ($250m), May-34 ($150m) and May-54 ($50m) lines. There will also be a small parcel of Sep-30 inflation-index bonds on offer.
The only domestic data of note in the day ahead of ANZ business confidence. The activity outlook picked up to a five-month high in September. The Bank of Japan is widely expected to leave rates unchanged at 0.5%. There is close to a 50% chance of a 25bp hike priced for the following meeting in December. The European Central Bank is also expected leave its policy rate unchanged at 2.0% as it assesses incoming data and ahead of fresh staff forecasts in December.
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Jason Wong is the Senior Markets Strategist at BNZ Markets.
