FED: Gov Kugler: "Some Way To Go" On Inflation
Feb-20 22:21
Gov Kugler (leans dove, permanent FOMC voter) reiterates her patient approach to further Fed easing in a speech Thursday (link here - "in considering the appropriate federal funds rate, we will watch these developments closely and continue to carefully assess the incoming data and evolving outlook.")
- Those "developments" are of course government policy shifts: "The potential net effect of new economic policies also remains highly uncertain and will depend on the breadth, duration, reactions to, and, importantly, specifics of the measures adopted."
- On Feb 7 she said that rates were likely to be held for "some time" while describing the January employment report as "consistent with a healthy labor market that is neither weakening nor showing signs of overheating.
- Today she notes that "the path [of inflation] continues to be bumpy and inflation remains somewhat elevated."
- Her latest comments come after the CPI and PPI inflation data - her take is that “Readings last week from the BLS showed price pressures persisted in the economy in January.”, and provides a core PCE estimate of 2.6% in January (in line with what other officials have projected).
- She comments that "those readings show there is still some way to go before achieving the FOMC's 2 percent objective."
- Kugler's speech discusses the Phillips Curve in depth (she is a labor economist), but stops short of delivering any decisive conclusions on what her analysis means for near-term monetary policy (“I think a clear lesson is that no single model alone can give a policymaker an understanding of every possible state of the economy").
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CNH: Wedged Between Key EMAs, Implied Vols Lower As Early Tariff Threat Lowered
Jan-21 22:16
After making highs of 7.2965 in early EU trade yesterday, USD/CNH mostly tracked lower as the US session unfolded. We track near 7.2650 in early Wednesday dealings, after positing little net change yesterday. Intra-session lows from Tuesday remain intact at 7.2524. Onshore USD/CNY spot finished up at 7.2656, leaving little CNH-CNY basis currently. The CNY CFETS basket fell 0.46% to 100.99, fresh lows in the index back to late Dec.
- The lack of upside follow through in USD/CNH post yesterday's tariff headlines for Mexico and Canada, likely reflected that nothing specific was mentioned y Trump in relation to China. This suggests there is perhaps some negotiating room between the two sides before Trump takes any specific action.
- EUR/USD rose back above 1.0400, likely seeing some positive spill over to the yuan as well. The single currency likely benefiting from no specific tariff threat from Trump.
- For USD/CNH technicals, we are wedged between the 50 (7.2860) and 100-day (7.2474) EMAs. Implied vols for USD/CNH sit off recent highs. The 1 month is back to 5.35%, against recent highs around 6.67%. We have seen similar trends across other parts of the implied vol curve.
- China Vice Premier Ding Xuexiang stated that China would boost its imports (see this BBG link). China also stated it was willing to talk to new US Secretary of State, despite him being on the sanctioned list (see this BBG link). This is a further sign we may see discussions on trade issues first before the US decides on any tariffs steps.
- The local data calendar is empty today.
GOLD: Gold Rallies as Trump’s Tariffs Unfold.
Jan-21 22:11
- Gold finished stronger today in the US trading day as the push pull of Trump’s tariff threats led to higher prices.
- Bullion opened at US2,708.21, rising throughout the trading day to $2,744.95.
- Gold typically likes either lower rates or a weaker USD and with Trump seemingly pulling back from tariffs on China for now, the USD was weaker against most Asian currencies.
- Gold also exhibits safe-haven status in times of volatility which no doubt will be in the days and weeks ahead as policies are announced.
- Trump has indicated that tariffs levelled at Mexico and Canada could come into place as early as February, and that he is considering a ‘universal tariff on all imports into the US’.
- The threat of tariffs, proposed increase in spending and trade wars sees investors having concern as to the pathway for inflation and hence interest rates.
- Whilst the geo-politics will have input into the short run impact for gold, the longer term direction for rates will be the most significant for gold.
- Some of the largest gold ETFs were up over 3% yesterday in what was one of the biggest moves year to date.
BONDS: NZGBS: Little Changed, Q4 CPI Prints Close To Expectations
Jan-21 22:05
In local morning trade, NZGBs are little changed after Q4 CPI data.
- Q4 NZ CPI was close to Bloomberg consensus expectations at 0.5% q/q and 2.2% y/y after 0.6% & 2.2% in Q3. Domestically driven non-tradeables were slightly lower than expected rising 0.7% q/q (Q3 +1.3%), while tradeables were higher at +0.3% q/q (Q3 -0.2%).
- “The largest contributor to the annual inflation rate was rent, up 4.2 per cent. Almost a fifth of the 2.2 per cent annual increase in the CPI was due to rent prices." (per Stats NZ)
- “Petrol makes up about 4 per cent of the CPI basket. Its price fall significantly contributed to the slower increase in the annual inflation rate in December 2024.”
- “If petrol was excluded, the CPI would have increased 2.7 per cent in the 12 months to December 2024.”
- Overnight, the US tsy curve bull flattened after Monday's holiday, with Trump administration policy remaining the focus after the presidential inauguration. US yields finished 1-5bps lower.
- Swap rates are little changed.
- RBNZ dated OIS pricing is 1-2bps softer across meetings after the CPI data. 45bps of easing is priced for February, with a cumulative 112bps by November 2025.
