Markets
Markets usually tend to stick to the sidelines ahead of important events. That event today is of course the Fed policy meeting. However, there was absolutely no such calm before the storm. Early sentiment was boosted by China’s pledge to stabilize markets in the form of supportive (fiscal and monetary) policies. Chinese bourses surged up to 12%!
Optimism was fueled further in the European session after Kremlin spokesman Peskov saying the Ukrainian proposal to become a neutral country but with its own armed forces “could be viewed as a certain kind of compromise”. The FT later reported “significant progress” was made on a tentative 15-point peace plan that includes a ceasefire and Russian withdrawal if Ukraine declares neutrality and accepts caps on its armed forces.
Equities pop higher with gains in Europe building to 4% and 3% in the US. Core bonds are under selling pressure. German yields advance +4.8 bps (2y) to 5.2 bps in the 10y yield. The latter is testing the 0.40% resistance level, formed by the 76.4% recovery of the 2018-2020 decline. The European 10y swap yield (1.04%, +2 bps) sniffed at resistance of 1.09% (2018 correction highs). US Treasuries outperform and add 1-3 bps across the curve.
US retail sales came in mixed with mostly disappointing figures for the reference month (February) but with material revisions to the January reading. The control group – the most indicative gauge for household consumption in GDP calculations – fell 1.2% m/m after having risen a strong 6.7% in January. Its market impact was understandably limited if not non-existent.
The dollar on FX markets stayed in the defensive ahead of the Fed. Some nervousness may play its part but its most likely the result of the outright risk-on. EUR/USD rose ¾ of a big figure to trade above 1.10 currently. The Japanese yen is being sold as well, especially vis-à-vis the euro. EUR/JPY jumps above 130 for the first time since end February.
The Swedish krone is outperforming major peers after Riksbank governor Ingves as last of the Mohicans threw in the towel. He said the central bank will probably have to raise rates earlier than the 2024 it incorporated in its analyses until now. Ingves didn’t want to rule out the first hike happening in 2022. The Swedish krone soars from EUR/SEK 10.61 to 10.39 in the biggest one-day strengthening move since 2009.• Going into the Fed meeting tonight, we’d like to give you the three main elements to keep a close eye on:
- Policy rate: it is all but certain the central bank will raise policy rates for the first time since 2015. After tonight, the US fed fund target will stand at 0.25%/0.50%, coming from 0%/0.25%.
- Dot plot: the individual policy rate assessment by Fed governors holds valuable information. How many rates can we expect this year, and more in general, over the policy horizon? US money markets have priced in (more than) 7 hikes for this year. We’re also keen to find out whether a majority of governors expect the policy rate to be above the neutral rate – seen at 2.50%. This would imply policy turns restrictive rather than “less accommodative”.
- Balance sheet roll-off: tonight’s meeting may be too soon still for a formal blueprint of the balance sheet roll-off. Powell said these discussions may take “several meetings”. That said, we keep our eyes and ears open for any hints regarding the matter.
News HeadlinesCanadian consumer prices rose by 1% M/M in February from 5.1% Y/Y to 5.7% Y/Y (vs 5.5% expected), the highest level since August 1991. Price increases were broad-based in February, pinching the pocketbooks of Canadians. Excluding gasoline, CPI rose by 4.7% Y/Y from 4.3% Y/Y in January. Details showed the largest yearly increase since May 2009 in food prices (7.4% Y/Y) while shelter costs rose at the fastest pace since 1983 (6.6% Y/Y). Statistics Canada announced that it will update basket weights for goods and services used in calculating CPI, adapting to post-Covid Canadian spending methods. The Canadian dollar didn’t react to today’s data release, but nevertheless ekes out nice gains because of the positive risk environment. USD/CAD drops from 1.2775 to 1.27.
