Australian financial markets has spent much of July waiting for two events; June quarter CPI figures in Australia and the July meeting of the FOMC. CPI figures came in as expected and now the FOMC meeting has been held and the federal funds rate has been kept steady, pretty much as most observers expected. Prior to the meeting, Federal funds futures implied no chance of a rate rise in July but a 19.5% chance of a September move. Post the meeting, not much changed.
Westpac’s Richard Franulovich summed up the local reaction when he said, “Today’s FOMC statement contained no great surprises.” However, he went on to say, “Overall the statement reads like a central bank that is inching closer to pulling the trigger on rates but it lacks the heavy “nudge, nudge, wink, wink” signals that were in their October 2015 statement that all but signalled a hike at the following 15 December meeting was coming.” Most economists focussed on parts of the statement such as “near-term risks to the economic outlook have diminished”, “the labor (sic) market strengthened” and “household spending has been growing strongly” but noted the committee’s acknowledgement of below-trend inflation.
NAB’s David de Garis reminded us of the Fed’s focus on data. “The Fed in the end will be data dependent; the statement noted that near-term risks to the economic outlook “have diminished” while also tweaking the statement to recognise the strong pick up in jobs in, strong household spending, but also that business investment has been soft.”
Both Westpac and ANZ noted puzzling reactions in the bond and foreign exchange markets; yields fell and the greenback fell against other currencies, typical of a “lower future interest rates” scenario, although another explanation is simply the “buy on rumour, sell on fact” behaviour of some traders. St George’s senior economist Janu Chan said yields had been dropping prior to the meeting because of weaker-than-expected data (durable goods and pending home sales) and this continued after temporarily halting when the Fed decision was published. US 2year yields finished down 3bps at 0.73% while US 10 year yields dropped 5bps at 1.52%.