Yesterday’s market moves may have been atypically erratic ahead of key events (see second bullet), but today’s for sure weren’t. US stocks open mixed while European equity markets fluctuated around opening levels and currently trade with minor losses of around 0.15%. Bond yields in the euro area gapped higher at the start of cash market trading before paring some of the gains. Maybe it were ECB Board Executive Schnabel comments in an interview late yesterday resonating in early European dealings. She said the central bank needs to act to prevent high inflation from becoming entrenched in people’s expectations and called a rate increase in July possible. Euro area money markets indeed are just shy of fully pricing in such a scenario. Anyway, German yields add 0.9 (2y)/3.9 bps (5y) in a daily perspective with the belly of the curve underperforming wings. Both the German 10y yield and the European 2y swap yield again banged on the 1% door but those resistance levels didn’t give in (yet?). The US curve bear flattens ahead of tonight’s Fed policy meeting that will pave the way for a series of aggressive rate hikes. Yields add up to 4.3 bps (2y, hitting a new cycle high). FX market moves are extremely limited. The currency in focus today, the USD, is trading marginally on the backfoot. EUR/USD ekes out a negligible gain to 1.055, the trade-weighted DXY eases to 103.25. Both still trade near multi-year lows/highs respectively. US data today included the ADP job report. With a 247k job creation, the bar wasn’t met (383k) but in combination with yesterday’s exceptional JOLTS data it still suggest a labour market in (more than) full swing. The US services ISM after this report gets published. US Treasury also announced it will reduce the size of the 2-, 3-, and 5-year note auctions by $1 billion per month in the next quarter. It also anticipates decreases of $1 billion to 10-, and 30-year note auction sizes starting in May. It’s the third straight reduction and possibly not the last even at the eve of the Fed starting quantitative tightening, citing “strong” federal tax revenues. No word on sterling here today. The Queen’s money’s time to shine is tomorrow (BoE).
It’s Fed-day. The central bank will almost certainly raise policy rates by 50 bps to 0.75-1%. Such a bigger-than-usual hike stretches back to 2000. What’s more is that it will be the first of several similar moves, making the current tightening cycle the most aggressive in almost three decades. Powell recently embraced such heavy frontloading. During the press conference, he’ll stress the importance of bringing the policy rate as soon as possible to neutral territory, estimated at 2.4%. Current circumstances (red hot labour market, sky high inflation) even warrant an outright restrictive policy rate. We therefore see little reason for Powell to forcefully push back against market expectations of at least four consecutive 50 bps hikes and a peak policy rate by mid-2023 between 3.25 and 3.5%. We will also see plans for a fast balance sheet roll-off formalized. March Meeting Minutes already revealed intentions of going from zero to $95bn per month in just three months’ time, extracting liquidity at a much faster pace than previously. Not only did the Treasury market lose a huge buyer a few months ago, from tonight on, the Fed will actually have become a net-seller. All this suggests both the USD and US bond yields remain supported.
The Reserve Bank of India raised its policy rate unexpectedly, in between meetings, by 40 bps from 4% to 4.4%. It’s the start of a tightening cycle and the first rate hike since mid-2018. RBI governor Das said that inflation must be tamed in order to keep the Indian economy resolute on its course to sustained and inclusive growth. He warned for the risk that prices stay at current or higher levels for too long (particularly food) and that expectations become unanchored. Headline inflation rose to 6.95% Y/Y in March, printing above the 2%-6% target range for a third month running. The Indian rupee initially gained ground, but failed to hold on to those moves. At USD/INR, the currency continues to trade near historically weak levels.