HomeContributorsFundamental AnalysisFed: Might Some Members Push Forward Their Rate Hike Expectations?

Fed: Might Some Members Push Forward Their Rate Hike Expectations?

Markets

US data yesterday was weaker than expected. Both retail sales and industrial production slumped in February. However, markets dismissed both reports easily with both to a large extent affected by the harsh weather and other technical elements. Core bond yields were looking for direction as they awaited the Fed. Both USTs and the Bund held a gradual downward bias for most of the European trading day but reversed course when US markets were in full swing. The US yield curve bear steepened with long yields up 1.3-2.4 bps despite very solid metrics for the 20y bond sale. German yield changes were negligible. Peripheral spreads widened a few bps with Greece (+4 bps) underperforming. Moves on FX markets yesterday were mainly euro-inspired. The common currency traded surprisingly weak again stthe USD, yen and GBP. EUR/USD flipped a morning rise quite aggressively after a failed test of the 1.1952 resistance. The pair temporarily dived below 1.19. EUR/JPY finished from 130.17 to 129.73. EUR/GBP tasted life outside the downward trend channel only briefly. The surge beyond 0.86 reversed and brought the pair back to the now very familiar 0.855/0.856 zone.

Asian markets trade relatively muted in a very quiet trading session. Chinese stocks are the exception though, flipflopping opening losses of more than 1% into small gains currently. Japanese exports slumped 4.5% y/y in February (-0.2% expected) as two of the key markets were either affected weather conditions (US) or saw business days cut because of the timing of NY holidays (China). Core bonds trade slightly lower. The US dollar is little changed.

All eyes are on the Fed today. Growth and inflation forecasts will likely have been upwardly revised because of the recently approved fiscal stimulus plan. The dot plot back in December suggested flat rates through 2023. The better economic prospects might have led to some Fed members pushing forward their rate hike expectations. While they will probably still represent the minority view, such a move is likely to be picked up by markets. The Fed’s view on higher interest rates up until now has been that it represents economic optimism. Striking a similar tone would spur another yield rally. Even when Powell would turn more dovish, we mainly see risks for higher bond rates with markets testing the Fed’s determination if words come without action. Indeed, given the improved forecasts, todayis n’t the time for putting money on the table. US long yields (10, 20 and 30-yr) are all close to recent recovery highs and are at risk for an upside break. Also keep a close eye at the very short term yields. Money market rates have been trending every closer to 0% and risk turning negative. Speculation builds the Fed might act to bring them more in line with the 0%-0.25% policy rate via a technical hike of interest rates on excess reserves. Higher yields should in any case support the dollar. EUR/USD might test 1.1836 support (current 2021 low). A clear and sustained break means a return to the sideways 1.16/1.20 trading range. Moves in EUR/USD might have knock-on effects on EUR/GBP as well and push the pair to 0.854 support in the run-up to the Bank of England meeting tomorrow.

News Headlines

Rating agency Standard and Poors affirmed the AA+ sovereign rating of the United States with a stable outlook. The rating agency says that the ratings are constrained by high general government debt and fiscal deficits, which worsened in 2020 due to the economic shock from the pandemic. However, the outlook remains stable as the rating agency expects rapid economic growth this and next year as the pandemic recedes and the economy benefits from unprecedented fiscal and monetary stimulus. Given this rapid recovery and gradual withdrawal of fiscal stimulus, the rating agency expects the general government debt to stabilize around 110% GDP.

According to a Forsa Poll, German Chancellor Angela Merkel’s CDU/CSU group reached the lowest support since the start of the corona pandemic. Support for the group dropped 4ppt to 29%. The result comes after the Conservatives already faced material defeats in two regional elections this weekend. The Greens made the biggest progress in the poll, up 3ppt at 21%. The social democrats reached 16%. Federal elections in Germany are scheduled for September this year.

 

KBC Bank
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This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

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