Fed announces the end of monetary tightening

Summary:

• Federal Reserve kept rates unchanged and communicated the end of monetary tightening
• New Zealand’s dollar climbs following the dovish Fed and a mixed GDP release
• Australian jobless rate fell in February to the lowest in eight years

Tipping point

As broadly expected the Federal Reserve maintained the level of interest rates unchanged during its March’s meeting and signalled that it was done with rate hikes as for this monetary tightening cycle. The “dots” showed the FOMC members saw no rate hikes this year (the two moves had been projected in December) and one move for the following year. For markets it was a dovish surprise even as it had priced in rate cuts before the meeting. Obviously markets tend to overreact and it was the case this around too, as a result the market-based likelihood shows almost 40% for a rate cut by the year-end. In our view the single rate hike being projected for 2020 seems to be ridiculous and it is remarkably unlikely that it will take place if the Fed is unable to move rates during the second half of the year. The updated GDP forecasts were lowered with the projection for this year being cut to 2.1% from 2.3% and for the next year to 1.9% from 2%. The PCE forecasts were subtly adjusted downwards as well while core PCE projections were left unchanged. In its separate statement on Wednesday the Fed communicated that it would start slowing the balance sheet reduction beginning from May - a cap on monthly redemptions of Treasuries was halved to $15 billion from $30 billion. After that the Federal Reserve plans to end the balance sheet reduction altogether at the end of September. On top of that, beginning in October the Fed will roll its maturing holdings of agency debt as well as mortgage-backed securities into Treasuries - a cap of $20 billion per month.

The EURUSD broke above 1.14 in the wake of the dovish Fed’s meeting. While the greenback seems to have lost its major advantage (higher rates on the horizon), its weakness could be selective. Keep in mind that rises on the EURUSD could be capped by the ECB’s current stance. Source: xStation5

Mixed data from Antipodean economies

Several hours after the Powell's press conference we were offered two important readings from New Zealand and Australia. First of all, New Zealand’s gross domestic product rose 0.6% QoQ in the final three months of the past year and matched expectations. On the other hand, the rate of growth slowed to 2.3% in annual terms from 2.6% and missed the median estimate of a 2.5% rise. The details showed a particularly small contribution of investment spending (0.3pp) to the annual rate of growth, the lowest since the second quarter of 2010. On quarterly terms the big disappointment came from investment in transport equipment being the sole category subtracting from the overall GFCF increase. Household expenditure stayed more or less stable with a contribution of 2.2pp while the year-over-year growth sped up to 3.5% from 3.3%. It is worth noting that net exports added 0.5pp to the annual rate of growth, the first positive contribution since the second quarter of 2016. At the same time inventories subtracted 0.5pp after the three consecutive quarters with positive contributions (note that we had a 1% positive contribution from inventories in the third quarter of 2018, hence the final three months brought a reduction of them via rising exports).

New Zealand’s GDP slowed more than expected in annual terms. Source: Macrobond, XTB Research

From the Australian economy we got the employment release producing the lowest unemployment rate in eight years - 4.9% compared to the consensus of 5%. Nevertheless, this decrease was fully offset by a decline in the labor force participation rate to 65.6% from 65.7%. In terms of a change in employment we got a 4.6k rise, the reading missed expectations pointing to a 15k rise. Breaking down the employment change it turns out that the entire increase came from part-time jobs which jumped 11.9k, full-time jobs decreased 7.3k. Both AUD and NZD are the best performing major currencies this morning but, at least in part, it could stem from the dovish switch in the Fed.

The Aussie keeps climbing this morning after breaking above the medium-term trend line yesterday. Source: xStation5

In the other news:

• Comments from UK MPs suggest PM Theresa May ruled out calling a general election

• The US 10Y yield slipped following the Fed and it trades at 2.524% at the time of writing