US 10 year bond yield fell 3bps immediately after the US core CPI release; USD is generally weaker overnight, with the Bloomberg DXY near to a two-week low; NZD is the best performing currency over the past 24 hours

By Nick Smyth

Bond yields are slightly lower overnight after US core CPI matched market expectations, allaying some fears of more aggressive Federal Reserve tightening.  US equities have fallen slightly with President Trump’s decision to fire Secretary of State Rex Tillerson weighing on sentiment.  The USD is weaker overnight and the NZD is back up to 0.7335, a two-week high. 

The US 10 year bond yield fell 3bps immediately after the US core CPI release, suggesting that the market had put some weight on a higher number, although it has since retraced most of that move.  The 10 year yield is at 2.86%, well within its recent range.  Since Fed Chair Powell’s testimony, market participants have speculated that the Fed could lift its 2018 rate projections (the ‘dots’) at its upcoming March meeting.  But with US core CPI and the most recent average hourly earnings data only matching expectations, the hurdle for 4 Fed centrist officials to raise their 2018 ‘dots’ at this meeting (which would increase the median forecast) now seems quite high.  The FOMC meeting is next Thursday morning. 

US equities initially got a boost from the on-expectations CPI release meeting, with the S&P500 rising to its highest level since early February.  But US equities has since fallen back and are now down modestly on the day.  President Trump announced shortly after the CPI release that he had fired Secretary of State Rex Tillerson.  The equity market appeared to react negatively to the exit of another mainstream official, following the recent departure of Gary Cohn.  Meanwhile, Trump said CNBC contributor and former Bear Stearns economist Larry Kudlow had a “very good chance” of replacing Gary Cohn.  According to Trump, Kudlow “has now come around to believing in tariffs” although his appointment would still be seen as more ‘market friendly’ than the other leading candidate, Peter Navarro. 

The USD is generally weaker overnight, with the Bloomberg DXY near to a two-week low.  As with the bond market, the USD fell after the CPI release, suggesting the market had been braced for a higher number.  The EUR has risen near to 1.24.  Overnight, ECB Governing Council member Lane said “There’s no concern about the current level” of the EUR, and he was more concerned about its volatility.  

The CAD is the weakest currency overnight after BoC Governor Poloz made dovish comments.  Poloz said the central bank “has concluded there remains a degree of untapped supply potential in the economy” and “Canada may be able to have more economic growth…without generating higher inflation.”  The BoC has raised interest rates three times this cycle and the market fully prices a fourth hike in July.  Canadian interest rates also fell on the day.

The NZD is the best performing currency over the past 24 hours, despite broader weakness in commodity prices.  The NZD is around 0.7335, up from 0.7290 this time yesterday, and near two-week highs.  NZ food prices released yesterday had no impact on the NZD although we did revise our Q1 CPI estimate a touch lower and we now expect the YoY rate to fall to 0.9%.  Today, the REINZ housing data is released alongside the balance of payments.  The market focus though will be GDP which is released tomorrow. 

The NZDMO issued $2b of a new 2029 maturity nominal bond yesterday at a yield of 3.135%.  The bond was issued at the tight end of price guidance (a spread of 16bps to the existing 2027 bond) and attracted an order book of over $5b, indicative of strong demand.  NZ longer-dated yields fell modestly yesterday in response. 

In local rates markets, the 2 year swap rate pushed up to 2.25%, its highest level since NZ CPI in late January (although well within its broader trading ranges).  The ongoing rise in US Libor-OIS has started to filter through to the NZ FRA-OIS rates and consequently NZ short-dated swaps.  The NZ swaps curve flattened. 


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