Markets Daily
Markets judged the FOMC statement, forecasts and Chair Powell press conference to be more dovish than expected. This sparked a fall in US yields and the USD and a jump in equities to close at record highs. AUD rose to 0.6585. Today’s crowded calendar includes Australia February employment, flash March PMIs in the Eurozone and UK and the Bank of England policy decision.
Yesterday
AUD/USD had another quiet local session, trading a narrow 0.6520-0.6541 range, with no Australian data of note. The ASX 200 closed -0.1%, sitting around the middle of this month’s range. Japanese equities extended their post-Bank of Japan decision rally, Topix up another 1.1%.
Currencies/Macro
The US dollar fell against all G10 currencies on the FOMC headlines, though the Japanese yen remained down on the day. USD/JPY initially rose from 150.80 to 151.82 – a four month high – but slipped to 151.30 post-Powell press conference. EUR/USD rose from 1.0865 pre-FOMC to 1.0920. GBP/USD rose from 1.2720 to 1.2785. AUD/USD rose from 0.6535 to 0.6585. NZD/USD rose from 0.6025 (a four-month low) to 0.6080. AUD/NZD extended its month-old uptrend from 1.0790 to above 1.0830, printing highs since 23 January.
The US Federal Reserve’s FOMC kept the Fed funds rate on hold at a mid-rate of 5.375%, as was universally expected. However, against expectations of a reduction in the number of rate cuts projected this year, the median was unchanged at -75bp (although the 2025, 2026 and long run projections were raised slightly). The statement itself was little changed from January's, the key sentence repeated, "The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent." However, there was a slight edit to the economic outlook: "Job gains have remained strong" versus January's: “Job gains have moderated since early last year but remain strong." There was no adjustment to quantitative tightening, the balance sheet to be reduced as previously planned. The vote was again a unanimous 12-0.
Fed Chair Powell, in his press conference, reiterated that the FOMC wants to see more evidence to gain confidence that inflation is moving down sustainably to 2%. He emphasised that the Fed has made progress, but officials want "confirmation that progress will continue." He did not push back against market expectations for a rate cut in June.
Interest rates
The US 2yr treasury yield fell from 4.67% pre-FOMC to 4.61%, while the 10yr yield fluctuated in both directions but is unchanged at 4.28%. Markets price about a 10-15% chance that the Fed funds rate, currently 5.375% (mid), is cut by 25bp at the next meeting on 2 May, with a 67% chance of a cut by June (up from 40% yesterday).
Australian 3yr government bond yields (futures) fell overnight from 3.64% to 3.58%, while the 10yr yield fell from 4.08% to 4.04%. Markets currently price the RBA cash rate to be unchanged at the next meeting on 7 May, with a 100% chance of a cut by September.
New Zealand rates markets price the OCR, currently at 5.50%, to be unchanged at the next meeting on 10 April, with a 75% chance of cut by August.
Credit indices were positive after accounting for the roll with CDX (S41) down to 46.5 (-1.5bp) and the new S42 at 51.5 (roll +4.8), however US IG cash was unchanged and US primary activity was absent on the way into the Fed. Europe, on the other hand, saw 11 issuers (ex-SSA) price EUR6.9bn.
Commodities
Crude markets gave back some ground as profit-taking set in ahead of the Fed decision. The May WTI contract is down 1.7% at $81.35 while the May Brent contract is down 1.5% at $86.09. The EIA reported an as-expected crude inventory draw of 1.95mb though gasoline inventory fell again by a hefty 3.3mb after the previous week’s 5.66mb fall. That’s the 7th consecutive fall for gasoline inventories. Crude exports rose by a hefty 1.7mbpd, the biggest rise since October, putting the total at a robust 4.9mbpd. BP’s massive Whiting refinery was said to have ramped up to nearly maximum rates after an abrupt loss of power idled the plant on Feb 1.
In gas markets, the Biden administration’s study of LNG exports won’t take as long as previous analysis of shipments, with US Energy Secretary Jennifer Granholm saying she was “confident it will [be concluded] close to this calendar year”.
Metals rallied after the Fed outcome with copper up 0.15% at $8,990 and aluminium up 0.6% at $2,283. Nickel rose 1% to $17,570 though tin fell again by another 0.78% to $27,230. Leading Chinese smelters are set to conduct a quarterly meeting next week and “may discuss production plans” according to Bloomberg. Smelters including Jiangxi Copper and Tongling Nonferrous Metals are set to meet Thursday “according to people with knowledge of the matter” with guidance for Q2 spot processing fees on the agenda. Chinese output of refined copper was a surprisingly strong 2.215mt in Jan and Feb, up 11% versus last year, despite last year’s total being a fresh record, up 17.4% versus the year before. The AIA reported that worldwide primary aluminium rose 0.37%yy to 191.2ktpd though Chinese production fell 3.48%mm to 111.6ktpd. Australia’s foreign minister Penny Wong told media she “discussed recent volatility in nickel markets and made the point that predictability in business and trade is in all our economic interests”. This follows an announcement from BHP on Wednesday that it has cut contractors working at its Kalgoorlie nickel smelter.
Iron ore markets were largely unchanged after rebounding from below $100 earlier in the week. The April SGX contract is unchanged from the same time yesterday at $106.26 while the 62% Mysteel index is down 80c at $106.65. Residential property activity remained weak in Jan and Feb, while steel inventories are high and steel mills are under pressure. China’s imports of iron ore in Jan and Feb combined were a record, up 13% versus the previous year and up 16% versus the average over the previous 5 years.
Day ahead
At 11:30am Syd, growth in Australian employment is expected to bounce back after a seasonally afflicted near-flat January reading (Westpac and market f/c: +40k). With participation holding flat at 66.8%, the unemployment rate is anticipated to round down to 4.0% from 4.1%.
Japan: The March Jibun Bank PMIs should continue to highlight the impact of poor productivity in manufacturing and the support offered to services from the tourism rebound.
NZ: Westpac anticipates GDP growth to hold flat in Q4, as softness in goods-producing sectors offsets tourism’s support to services activity (Westpac f/c: 0.0%; market f/c: 0.1%).
Eurozone: The advance March S&P Global/HCOB PMIs are expected to reflect a modest improvement in services while weakness in manufacturing activity remains broad-based (market f/c: 50.5 & 47.0).
The Bank of England is expected to keep rates on hold today as strong wages growth and sticky services inflation keeps policymakers on their toes (Westpac f/c: 5.25%; market f/c: 5.25%). Meanwhile, the March S&P Global UK PMIs are set to confirm a weak backdrop for manufacturing, though services activity has been surprisingly resilient of late (market f/c: 47.8 & 53.8).
US: The March S&P Global PMIs will likely feature a robust services sector supported by solid real incomes (market f/c: 52.0); this survey’s signal of manufacturing conditions (market f/c: 51.8) stands somewhat in contrast to the ISM PMI and other regional surveys such as the Philly Fed index, which are pointing to fragility in the sector (market f/c: –4). Growth in existing home sales is set to partially retrace its year-opening bounce (market f/c: –1.5%). Initial jobless claims are expected to remain at a relatively low level (market f/c: 213k). Fed governor Barr is also due to speak.
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