January 29, 2015

FOMC Marks Time As RBNZ Drops Tightening Bias

The USD Index is little changed, but yields are marginally lower after the Fed issued a post meeting Statement repeating it can be “patient” in beginning to normalise monetary policy.

The USD Index is little changed, but yields are marginally lower after the Fed issued a post meeting Statement repeating it can be “patient” in beginning to normalise monetary policy. NZD/USD has been a big mover however, as the RBNZ announced it expected to keep the OCR on hold for some time, stressing “future interest rate adjustments, either up or down, will depend on the emerging flow of economic data.”

The Fed Statement offered few surprises and some subtle changes that keep the FOMC’s options open to either begin the tightening later this year of hold off, should conditions not warrant a shift in policy.

The Fed upgraded its description of economic growth from “moderate” to “solid pace”, in line with the 5% annualised rate seen through Q2, Q3 and ahead of data Friday that should show the economy expanded at a 3% annualised pace in Q4. The Fed noted that the recent declines in energy prices have boosted household purchasing power. The Statement acknowledged a further improvement in labour market conditions with “strong” as opposed to “solid” job gains, noting that the underutilisation of labour resources “continues to diminish”.

On inflation the FOMC added that market-based measures of inflation expectations have “declined substantially” in recent months, but while inflation is “anticipated to decline further in the near-term”, the Committee expects inflation “to rise gradually toward 2% over the medium-term.”

Alongside labour market conditions, indicators of inflation pressures and expectations, the Fed included “international developments” to the list of things it is monitoring as it determines how long to maintain the current 0 to ¼ percent Fed funds target rate. That notation and the expectation that inflation will rise ‘over the medium-term’ have pulled yields marginally lower, the US 2-year from 0.51% to 0.47%. US 10-year yields are off 5bps at 1.73%.

At the time of writing the USD DXY is up very marginally at 94.50 from 94.20, with EUR/USD down at 1.1310 from 1.1340. UISD/JPY is flat at 117.65. NZD/USD has fallen hard from 0.7460 to 0.7369 in light if the RBNZ’s shift in policy. While Wednesday’s Australian Q4 CPI report saw the market reduce pricing of a near-term rate cut, media reports from Terry McCrann overnight that the RBA may well ease next week and will at the minimum change its period of stability language and today’s RBNZ shift has nudged AUD/USD marginally lower to 0.7935 from 0.7960.

Coming Up

After the excitement of the Fed and RBNZ meeting, the local data calendar quietens down somewhat with second tier data in the shape of Australia’s Conference Board Leading Index and then Q4 import and export prices where the lower AUD is expected to have pushed up import prices.

Later in Europe German flash CPI data for January will be released. The consensus looks for -0.2% y/y from +0.1% in December and this will set the scene for Euro Zone CPI (HICP) on Friday where the expectation is annual inflation will slide to -0.5% from -0.2% in December. The Euro Zone also releases a raft of confidence data for January. On balance an in line with the recent modest improvement seen in the PMIs and German Ifo/ZEW surveys, business, consumer, services, industrial and economic confidence is expected to improve on the month.

The US releases weekly jobless claims, where the consensus looks for 300k after 307k last week. December pending home sales are expected to rise 0.5% m/m after ab 0.8% gain in November.

New Zealand releases December building permits and net migration data. The week closes with some important US data in the shape of the Q4 Employment Cost Index, which will provide some important information on wages amid mixed data from average hourly earnings reports (softer) and NFIB small business compensation deals (stronger).


On global stock markets, the S&P 500 was -0.40%. Bond markets saw US 10-years -11.08bp to 1.71%. On commodity markets, Brent crude oil -2.00% to $48.6, gold was -0.6% to $1,284, iron ore -0.7% to $63.09. AUD is at 0.7911.


For further FX, Interest rate and Commodities information visit nab.com.au/nabfinancialmarkets



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