A further slowing in growth
Janet and Co. has spoken and like the Commodores before them, re-affirmed that three is the magic number.
This remains the number of time the Fed thinks it will most likely raise rates this year in total, and again in 2019. Together with the absence of any reference to when balance sheet shrinkage might commence (either in the FOMC statement or Yellen’s press conference) and a view that inflation – currently described as below target ex-food and energy – is likely to stabilise around 2% over the medium term rather than move above, marked out the Fed affair as slightly more dovish than some were positioned for going in to the FOMC pronouncements. The dissent of one FOMC member, Neel Kashkari, in favour of no change today was noted though really no surprise.
The Fed wasn’t dovish per se, but with near record short speculative positioning in the US interest rate futures markets, and an expectation that if the Fed was going to do anything today with the ‘dots’ it would be to ratchet three up to four for either this year or next, markets really only had one way to react. Hence 10yr yields are down some 10bps (to 2.498%) and 2s down 7 bps.
That reaction has been most pronounced in currency markets and where the Aussie dollar – already in the ascendency during the late APAC and European morning session – has jumped a full cent to spend time briefly back on a 0.77 handle (high of 0.7719). The New Zealand dollar isn’t far behind, up 1.5% since this time yesterday and for the first time in over a week, to a high of 0.7039. We should also acknowledge here a very good night for commodities either side of the Fed, with oil up around a dollar, gold by almost $20 and iron ore up $2.79 to $90.93 – the first time above $90 since the beginning of the month.
Ahead of the Fed, US data showed CPI and retail sales coming in much as expected. With the core CPI measure rising 0.2% and, meaning year-on-year at 2.2% down from 2.3% (the Fed’s preferred PCE deflator core measure, implicitly reference in the FOMC statement, remains below 2%). Headline CPI, at 2.7% is now at its highest since December 2012. Retail sales rose by 0.1% as expected on the headline, 0.2% ex-autos versus +0.1% expected and with some favourable back revisions. The NAHB housing index was very strong at 71 from 65, probably the result of very favourable weather. Earlier Wednesday, UK labour market data shows employment strong (and unemployment down) but earnings weak (down to 2.2% 3M Y/Y from 2.6% previously).
Post-FOMC, the other key event risks this week now come thick and fast. The Dutch general election results aren’t expected to be a market mover, though we’re on guard for the performance of Geert Wilders’ Freedom Party (PVV) having some impact on thinking about how well or otherwise Marine Le Pen might poll next month. The polls have just closed (07:00 AEDT) and first results, from the small island of Schiermonnikoog, are expected within the hour, as too an exit poll that is reported to cover some 38,000 people – a much more significant proportion of the voting population that the (wrong) equivalent exit poll on Brexit last June. The worse the PVV is seen to be faring, the more this can play with the grain of the post-Fed rally in the Euro.
Far more important in the scheme of things, Thursday is supposed to bring the outline of the Trump administration’s budget ambitions but with a detailed Blueprint not promised before later in May. At this stage we don’t know whether the news will have come out overnight to greet us this time tomorrow, or will only emerge during our Friday (late afternoon/Thursday evening Washington time). Either way, we expect it will be very light on detail (and note that Janet Yellen made clear in her press conference that no discussion or assumptions about fiscal policy had featured in their deliberations).
Also still to come is the commencement of the G20 meeting (Friday) and the delayed meeting between German Chancellor Merkel and US president Trump. Before that that, we’ll get the latest decisions from both the Bank of Japan and Bank of England, neither of which are expected to offer any hint of early policy changes.
Locally, we get the February Labour Force survey today, which NAB expects will unveil a 25K rise in employment (consensus 16.0k) after last month’s 13.7k gain. The unemployment rate is expected to dip by a tenth from 5.7% to 5.6% (consensus 5.7%). Lying behind this expected somewhat higher employment growth and tone have been stronger indicators of labour demand. For instance, recent readings on Employment from the NAB Survey (as well as the AiG surveys) have pointed to stronger employment growth. The trend in the NAB Employment index is consistent with employment growth of around 20k-plus per month. SEEK Job Ads have also picked up in recent months.
Before this, we get Q4 NZ GDP where are BNZ colleagues forecast a below-consensus 0.4% outcome (market +0.7%). US data tonight includes weekly jobless claims, the Philly Fed survey, housing starts and JOLTS job openings.
On global stock markets, the S&P 500 was +0.93%. Bond markets saw US 10-years -10.36bp to 2.50%. In commodities, Brent crude oil +1.83% to $51.85, gold+1.4% to $1,219, iron ore +3.2% to $90.93, steam coal +0.9% to $81.65, met.coal -0.2% to $159.00. AUD is at 0.7715 and the range since yesterday 5pm Sydney time is 0.7555 to 0.7719.
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