FOMC says case for rate rise strengthened but elected not to pull the rate hike trigger; market pricing no chance of RBNZ rate hike; BoJ to take control of the shape of the yield curve

By Kymberly Martin

NZ yields were little changed yesterday ahead of the key event risk this week, the US FOMC and RBNZ announcements. US yields are a little lower after the FOMC.

The market prices virtually no chance of an RBNZ cut today but ultimately looks for the OCR to be cut to around 1.70% in the year ahead. i.e. it fully prices one 25bps cut and assigns a 20% chance to a further cut. The RBNZ’s aim today, with its short OCR review, will likely be to keep this pricing relatively unchanged. This will leave open the option for it to cut in November. Let’s see.

The Bank of Japan made its much awaited announcement yesterday afternoon. It left its policy rate target at -0.1%. Alongside this regular announcement the BoJ published its one-off assessment of its monetary policy framework. This outlined a few key factors for improving its easy monetary policy stance. Essentially the Bank will now seek to overshoot its 2% inflation target (so as to hopefully boost inflationary expectations). It will expand its monetary base until it achieves this.

It will no longer have an average maturity target for its JGB holdings. Rather, it will make attempting to control the shape of the yield curve a central plank of its mandate. It will target a not too flat yield curve (a flat curve has negative consequences for bank profitability). It may vary the pace of its asset purchases to affect yield curve shape.

On the announcement, Japanese long yields led US equivalents on a brief burst higher. However it proved short-lived. Japanese 10-year yields are back at -0.03%, while US equivalents traded at 1.70% ahead of the US FOMC announcement.

The US Fed left its cash rate unchanged as widely expected. However, the committee now sees near-term risks to the economic outlook as “roughly balanced” as opposed to previously saying risks to the outlook “had diminished”.

The Fed appeared to be more actively preparing the market for the possibility of a December hike; “The Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives”. It was notable that the vote to leave the Fed funds rate unchanged was taken at 6-3. This is an increase in dissent from recent 9-1 or 10-0 votes.

The Fed’s ‘dot plot’ showed Fed members expect one more 25bps hike this year but have scaled back their expectations for next year and longer-term. The Fed’s average long-run ‘dot point’ was downgraded from 3.1% to 2.9%.

US yields are still in the process of absorbing the statement. After an initial spike higher, US 10-year yields are now trade a little lower, at 1.67%. This is unsurprising, given the continued ratcheting down of long-term rate expectations. The OIS market prices around 16bps of Fed hikes by year-end.

Daily swap rates

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for(i=0;i

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Kymberly Martin is on the BNZ Research team. All its research is available here.