Market movers today
Markets will continue to digest the FOMC meeting yesterday while focus turns to meetings in Bank of England (BoE) and SNB today. We look for BoE to hike the Bank Rate by another 25bp but simultaneously still send mixed signals by repeating that “some degree of further tightening in monetary policy may still be appropriate in the coming months”.
In Switzerland, we do not expect the SNB to hike but the pressure is increasing, as the ECB is about to hike policy rates and CPI inflation is running close to 3%.
In the US data releases for housing starts, initial jobless claims and the Philadelphia Fed business survey is due out.
We will also keep an eye on German Chancellor Scholz, French President Macron and Italian PM Draghi’s visit to Ukraine for talks with President Zelenskiy.
Early Friday, Bank of Japan (BoJ) finishes up a two-day policy meeting. Our base case is that they will keep steady but the chance of a tweak to the yield curve control set-up in order to ease JPY headwinds has increased just as is the case for the chance of BoJ intervening in the FX market on behalf of Tokyo.
The 60 second overview
Fed: In line with expectations, the Federal Reserve decided to hike the target range by 75bp to 1.50-1.75%. We have emphasised for a long time that the Fed could be forced to follow the “emerging market central bank playbook” by out-hiking expectations and yesterday’s announcement seems to be the first step in that direction. While the Federal Reserve now says it is “strongly committed” to get inflation back to 2%, Chair Jerome Powell’s press conference was interpreted dovishly, as he indicated that the Fed is not going to make a string of 75bp rate hikes. EUR/USD moved higher and 2yr US Treasury yields declined after this comment. We change our Fed call now expecting the Fed to hike by 75bp in July and 50bp in September, November and December, see Fed Research – Review: big rate hikes until inflation pressure eases., 15 June.
ECB: To address the recent spread widening in particularly Italy, ECB decided to announce that they will flexibly implement the PEPP reinvestments as well as accelerate the work on a new anti-fragmentation work for the governing council to consider. The political signal is strong, but the exact details will determine the actual strength of a potentially new anti-fragmentation tool. We see the decision today as the most likely outcome for now. Further, with ECB tasking the committees they have sent a signal that they are fully committed to ensuring the functioning of the monetary policy transmission. However, they have also bought themselves some time. We will likely only hear from the committees at the July or September meeting.
Japan posted its biggest trade deficit in eight years in May, as import costs continue to weigh heavily for one of the world’s biggest energy importers following the big nose dive in yen. Nearly half of Japanese firms see the weak yen as bad for business according to a private survey, see Reuters.
Equities: Equities in a relief rally after a convincing Fed and deflationary macro data. Sector performance reversed with cyclical growth sector (tech) outperforming defensives. Hence, big gap between indices with S&P 500 rebounded 1.5% but Nasdaq 2.5%. Futures are pointing somewhat higher this morning too.
FI: The market reaction to the FOMC meeting yesterday may seem surprising as US Treasury yields/rates declined on the back of a fairly aggressive Federal Reserve and we are revising our forecast for the monetary policy path upwards. Similar to others we change our Fed call and now expect the Fed to hike by 75bp in July and 50bp in September, November and December. However, the market is focusing on the recession risk as well as the comments from Powell that they are not expecting a string of 75bp moves. Yesterday, the ECB announced that they will prepare a backstop facility to stop market fragmentation sooner rather than later. This lead to a massive rally in the periphery and solid spread tightening.
FX: EUR/USD had quite a volatile session yesterday. At some point, EUR/USD was above 1.05 before moving down below 1.04. The cross ended the day slightly above 1.04 after the cross was supported by dovish comments (at least compared to market pricing) from Fed Chair Jerome Powell. EUR/GBP started the day by moving above 0.87 but ended below 0.86. We could see slight relief for NOK and SEK near-term as Fed did little to tighten financial conditions more than what was already priced going into the meeting.
Credit: Credit markets took a pause yesterday from the past several trading days of widening. The indices closed ahead of the Fed decision, with iTraxx main closing some 3.5bp tighter at 105bp and Xover closing some 16.6bp tighter at 527.9bp.
