Market movers today
Markets will continue to digest yesterday’s Fed meeting (see below) and watch out for further headlines about a potential ceasefire agreement in Ukraine.
Given high inflation pressures in the economy and rising wage growth, we expect Bank of England to raise policy rates by another 25bp for a third consecutive meeting. Despite the uncertain outlook, markets still envision a rapid pace of tightening this year, with the benchmark rate ending 2022 around 2%.
ECB’s Lagarde (10:30 CET), Lane (11:15 CET) and Schnabel (13:45 CET) will speak at today’s ECB Watchers Conference. Final HICP figures for February are also due and will give more clues what drove the further rise in core inflation to 2.7%.
After the drop in the Empire Index earlier this week, it will be interesting to see whether today’s Philly Fed Index also points to a slowdown in US manufacturing activity in March.
The 60 second overview
Fed: As widely expected, the Federal Reserve hiked the Fed Funds target range by 25 basis points in its meeting last night. The updated ‘dot plot’ now signals a 25bp hike at every meeting this year, but we still think this is not enough to curb the current broad-based inflationary pressures. Instead, we continue to expect further 175 basis points worth of hikes in 2022, with a 50bp hike in June and announcement on QT in May. Seven of the 16 FOMC members look for at least 175bp worth of hikes this year, while markets price in a total of around 158bp this morning. Powell noted that the war in Ukraine creates uncertainty and additional inflationary pressures. That being said, the Fed is in a situation where it cannot take several factors into account when conducting monetary policy, because inflation is already nearly 8% (the highest in 40 years) and the labour market is “extremely tight”, as Powell mentioned. Read our more in-depth take at Fed Research – Review: Fed is still behind the curve despite signalling six further rate hikes, 16 March.
War in Ukraine: While fighting and shelling still continues in Ukraine, yesterday brought some positive signals from the ceasefire negotiations. Russia is said to consider a draft of a peace deal, where Ukraine would maintain its independence and current government, but renounce its push to join NATO and also promise to not host foreign military bases in Ukrainian areas. Markets have seen the developments in the negotiations this week as positive, with equities continuing to rise. There is still considerable uncertainty, though, and for example the implications for the eastern Donbass region and Crimea remain unknown.
Macro: This morning, we published our updated global economic forecasts in Big Picture – Headwinds to the global economy from Ukraine war and Fed tightening, 17 March. The war in Ukraine weighs on growth especially in the Euro Area, but we still expect the global economy to escape a recession. The rising inflation is eroding consumers’ purchasing power and thus weighing on growth, and we now see Euro Area GDP growth at 2.5% this year (from 3.8% previously) and 2.8% next year (from 1.9%). Euro Area inflation will continue accelerating in the near-term, with a peak around 8-9% in the coming months. The US economy is better isolated from the crisis, as US generally is a less open economy, and does little direct trading with Russia. We have still taken down our expectation of US growth to 2.8% for 2022 (from 3.5%) and 2.0% for 2023 (from 2.2%), slightly below Fed’s median projection released last night. China is walking a fine balance in the Ukraine conflict, and facing further headwinds from the weakening Covid-19 situation. We have thus delayed our expectation of a recovery to H2 this year, and taken down the 2022 GDP forecast to 4.7% (from 5.0%).
Equities: Massive risk-on in equities yesterday kicked off by the “whatever it takes” message from Chinese authorities. Optimism boosted by the neutrality plan to end the war in Ukraine. FOMC meeting gave some intraday setback in US but after digesting the message from Powel, equities took off again and ended at day high. Most beaten sectors in a strong comeback yesterday with consumer cyclicals rising 5%. Best performing sector year to date energy was the only sector lower yesterday. Growth outperformed by 2% value even as yields rose sharply yesterday.
In US Dow +1.6%, S&P 500 +2.2%, Nasdaq +3.8% and Russell 2000 +3.1%. Optimism continuing in Asia this morning driven by Hang Seng, tech and property developers. US futures are flat while European futures are slightly higher this morning.
FI: The European session was range trading with no specific direction reacting to Ukraine headlines while waiting for the FOMC meeting. The clear message from Powell after the 25bp hike yesterday was to tighten financial conditions, with policy rates to be raised above neutral. While Powell suggested a gradual process, the process of tightening could go faster as they remain data dependent, and we could even see balance sheet reduction in May. Rates markets responded with a bearish flattening, with two year US yields up by 9bp to 1.93%, while the 30y point was down by 4bp. With the Fed on course to slow the economy to dampen inflation pressure, curve inversion is in scope. 2s10s USD, 1y fwd swap is already inverted by 22bp (2s10s usd swap is +11bp).
FX: In a V-like price action post Fed’s announcement, EUR/USD first declined on higher USD rates but later rebounded on the rally in risk to levels above 1.10. EUR/NOK was little changed while EUR/SEK extended the latest move lower trading below 10.40. USD/JPY temporarily broke 119 but moved back to levels prior to Fed’s announcement. EUR/GBP was little changed.
Credit: Due to improving momentum around peace talks between Russia and Ukraine, the credit markets had a strong day yesterday. iTraxx main tightened 5.7bp to 73.4bp while Xover tightened 29.1bp to 347.3bp. We saw similar strong signs from the cash bond market. Also the primary markets revitalised with several new deal announcements.
