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Market Comment – Fed minutes confirm caution about lowering rates



  • Fed minutes reveal concerns about lowering rates too soon

  • Rate cut bets are pushed back but dollar remains unimpressed

  • Kiwi continues to gain on increasing RBNZ hike speculation

  • Wall Street closes mixed, Nvidia beats earnings estimates

Dollar slides further despite hawkish Fed minutes

The dollar traded lower against all but one of its major counterparts yesterday, with the New Zealand dollar being once again the main gainer and the Japanese yen the exception.

The minutes of the latest FOMC decision confirmed that policymakers were worried about the risks of lowering interest rates too soon and yet the dollar remained on the back foot. Perhaps that was because the minutes painted the same picture as the meeting, offering no new information or surprises.

Having said that though, although traders were not excited enough to initiate new long dollar positions, Treasury yields rose yesterday, and according to Fed funds futures, investors scaled back their rate cuts bets a bit more. The total number of basis points worth of reductions anticipated by the end of the year slid to 87 from 90, while from being fully priced in, a 25bps cut in June is now receiving around a 90% chance.

What may have also prompted participants to continue pushing their implied rate path higher are comments by Richmond Fed President Thomas Barkin who said that January’s inflation data complicate their upcoming decisions, though he added that he was reluctant to put “too much weight” on the release due to seasonal measurement issues.

Today, dollar traders are likely to turn their gaze to the preliminary US PMI data for February, although they tend to pay more attention to the ISM indices. Expectations are for fractional declines in both the manufacturing and services PMIs and thus, investors may dig into the details and the subindices of the reports for clues on how employment and prices charged fared.

Comments by more Fed officials could also impact traders’ thinking. Today's speakers include Fed Vice Chair Jefferson, Philadelphia President Harker, Minneapolis President Kashkari and Board Governors Cook and Waller.

Increasing RBNZ hike bets add fuel to kiwi’s engines

The kiwi extended its winning streak as, despite New Zealand’s widening trade surplus for January, more investors were convinced that the RBNZ could raise interest rates by another 25bps at next week’s gathering. The probability of such action rose to 30% from 25%, while the chance of that happening by May has risen to almost 60%.

That said, for the risk-linked currency to continue outperforming its peers heading into next week’s decision, New Zealand’s retail sales for Q4, due out during the Asian session tomorrow, may need to come in better than expected. Otherwise, disappointment could result in a notable pullback.

In the Eurozone, the preliminary PMIs for February were out today, revealing some further contraction in the manufacturing sector, but pointing to more improvement in services, with the respective index escaping contractionary territory and rising to 50. Euro traders remained indifferent at the time of the release as they had already reacted to the French and German data. The common currency gained as the French indices beat estimates on all fronts but reversed those gains on the largely worse than expected German prints.

The UK PMIs were also released today. The manufacturing index improved somewhat, but missed estimates and remained below 50, while the services PMI held steady, confounding expectations of a fractional slide. This resulted in further improvement in the composite index to 53.3 from 52.9 and allowed investors to maintain bets that the BoE may start cutting rates after the Fed and the ECB.

Nvidia beats market estimates, oil rebounds on geopolitics

Wall Street closed its Wednesday session mixed, with the S&P 500 and the Dow Jones eking out small gains, but with the Nasdaq losing some ground. That said, with Nvidia’s stock rallying in after-hours trading as the firm reported better-than-expected earnings results, all three indices may be poised to open with a positive gap today.

The tech-giant’s stock was in a sliding mode the last few days, perhaps due to investors locking profits ahead of the risk event. However, with the firm also forecasting fiscal first-quarter revenue above expectations due to robust chip demand, investors may be willing to continue pricing future growth opportunities related to artificial intelligence (AI), despite overstretched valuations of high-growth tech firms.

In the energy sphere, oil prices rebounded yesterday as geopolitical tensions in the Middle East heightened and market participants got more worried about supply tightness. Israel intensified its bombing in Gaza, while Houthi attacks on commercial vessels in the Red Sea and Bab al-Mandab strait have continued, with at least four vessels being hit since last Friday.

Gold also continued drifting north due to a weaker dollar as well as safe haven demand.

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