Market movers today
After the Fed decision yesterday, markets will shift their attention to the Bank of England (BoE) meeting today. In line with consensus and market pricing, we expect BoE to hike the Bank Rate to 1.00% from 0.75%, but stick to its softer guidance on the pace of future rate increases compared to what markets are expecting (read more in Bank of England Update Preview: Another rate hike and active QT, 2 May).
We expect Norges Bank to stay on hold at today’s meeting, but to reiterate that it will most likely hike in June. This would be consistent with the guidance put out in March, and as it is only an “interim” meeting followed by nothing more than a press release, the threshold for deviating from plan would normally be high. The development since the March meeting has been mixed, but as wage and inflation figures have been marginally to the downside, there should be no reason for Norges Bank to depart from its plan for a gradual normalisation of monetary policy.
OPEC+ convenes for its regular meeting and markets will look out for any indications of planned output increases after the EU is working on a Russian oil embargo this year.
The Czech and Polish central banks are expected to raise their policy rates by 50bps and 100bps, respectively, taking their policy rates to 5.50% to combat the high inflation pressures experienced in the countries for more than a year.
The 60 second overview
Federal Reserve: As expected, the Fed delivered a 50bp rate hike, the first one of its kind since May 2000, taking the Fed funds target range to 0.75-1.00%. Also as expected, Fed chair Jerome Powell hinted that the Fed will hike by 50bp at the “next couple of meetings”. Powell supported risk sentiment by saying that the Fed is not “actively considering” a larger 75bp rate hike although he did not rule it out. The Federal Reserve announced QT will start in June and that the cap will increase to a total of USD95bn over three months (starting by USD47.5bn/month). We keep our Fed call unchanged still expecting 50bp rate hikes in June and July and 25bp in September, November, December, January 2023 and March 2023. We still see risks skewed towards more aggressive tightening (75bp or more meetings with 50bp). See our Fed Research – Review: 50bp rate hike but no appetite for 75bp (yet), 4 May.
EU sanctions: The EU is yet to reach an agreement on its sixth round of sanctions against Russia. The current debate includes a proposal for a phased-in ban on imports for Russian crude (over the next six months) and refined oil (by the end of this year), exclusion of Sperbank and two other Russian banks from SWIFT, a bar for European ships to transport Russian oil and petroleum to any parts of the world and a crackdown on Russian broadcasters that the EU blames for disinformation (see FT). Within EU, the sixth sanctions package has proved the most difficult thus far to agree with. Hungary is the most vocal opponent of the oil embargo, but Slovakia, Czech Republic and Bulgaria have also voiced their concerns. As a further sign of a rift, Greece is objecting to the ban on European fleet to transport Russian oil products.
Equities: For the first day in a very long time, equities rallied as a result of the Fed meeting. This was not on the back of a dovish message from the Fed. It was the response to the lack of a hawkish message, which is a market mover in itself these days. S&P500 surged 3%, driven by primarily cyclicals and growth names. However, the rally was broad based with almost all sectors higher and banks, communication services and tech leading. S&P500 closed up 3%, Nasdaq 3.2%, Dow 2.8% and Russell 2000 2.7%.
FI: Risk had a tough day again yesterday which lead to spread widening in EUR rates space across all jurisdictions as we awaited the Fed decision last night. Fed delivered a 50bp hike and a gradual QT scheme starting with USD47.5bn in June to up to USD95bn from September (whereby 30bn and up to 60bn is in treasuries). During the press conference, Powell signalled more 50bp rate hikes at the “next couple of meetings”. Powell supported risk sentiment by saying that the Fed is not “actively considering” a larger 75bp rate hike although he did not rule it out. Rates responded by sending shorter dated papers lower by 14bp (2y), while 10y UST rallied only 4bp, and yet again the 10Y UST was rejected by the 3% mark. The BTPs were generally under pressure against peers with short-end spreads widening 11bp (6bp in the 10y point) and traded just shy of 200bp yesterday, however we remain quite some distance from where we would expect ECB to intervene.
FX: We focus on the fact that FOMC is highly motivated to curb inflation pressures and see downside risks to our EUR/USD forecast of 1.05 in 12M. Everyone expects the BoE to hike the Bank Rate by 25bp to 1.00%, today.
Credit: Credit markets were soft from the opening and widened throughout the day, with iTraxx Xover closing 13.8bp wider and Main 2.9bp wider. Hence, CDS indices are now back to the level where they stood in May 2020.
Nordic macro
We expect Norges Bank to stay on hold at today’s meeting, but to reiterate that it will most likely hike in June. This would be consistent with the guidance put out in March, and as it is only an “interim” meeting followed by nothing more than a press release, the threshold for deviating from plan would normally be high. The development since the March meeting has been mixed, but as wage and inflation figures have been marginally to the downside, there should be no reason for Norges Bank to depart from its plan for a gradual normalisation of monetary policy.
