Thu, Sep 29, 2022 @ 07:37 GMT

Fed to Hike by 75bp

Market movers today

The big focus of the day is the FOMC meeting tonight, where we expect a 75bp hike. Financial markets agree with this view with about 78bp priced in as of yesterday. For more details see our Fed preview Research US – Fed preview: Fast pace hiking cycle continues, 16 September.

The strategic oil reserve release in the US may also attract some attention as the Biden administration has been selling a lot of oil reserves to keep the oil price in check.

Overnight, Bank of Japan announces its policy decisions. We expect the central bank to stick to its yield curve control, highlighting that underlying inflation pressures are still relatively muted, despite the latest uptick in inflation.

The 60 second overview

Riksbank: The Riksbank increased the repo rate by 100bp to 1.75% while QE reinvestment levels were announced to be unchanged for the remainder of the year, in contrast to our expectation of a 75bp hike and a stop of QE reinvestments. The new rate path signals a slowdown in hiking pace for the November meeting (c. 45bp) and the rate path peaks around 2.5% in Q2 2023. Market is unlikely to buy into that story (FRA curve peaks around 3.6%) and we for now stick to our forecast of 75bp in November. As we said earlier, a February 2023 hike cannot be ruled out but it is not our base case for the moment.

Fed: While longer UST yields continued to move higher yesterday, the market seems well priced for a 75bp hike by the Fed this evening. Despite the high August CPI print, real yields have already risen clearly over the past weeks following Powell’s hawkish Jackson Hole speech, and last Friday the easing in University of Michigan’s consumers’ longer-term inflation expectations further decreased the likelihood of a 100bp move. Despite this, we think Fed cannot yet afford to signal a ‘pivot’, as the economy is still performing relatively strongly, and the tight labour markets continue to support broad-based price pressures. Instead of a larger 100bp hike, we see risks tilted towards Fed continuing the streak of 75bp hikes also in the coming meetings.

War in Ukraine: The Russian-installed administrations in four Eastern Ukrainian areas announced plans to hold referendums on joining Russia over the next week. The announcements come after several weeks of Ukraine making progress towards recapturing areas in the east. Ukrainian foreign minister Kuleba commented that the plans have little effect on Ukraine’s efforts, saying that “Ukraine has every right to liberate its territories and will keep liberating them whatever Russia has to say”. Yesterday, the Russian Duma also passed laws increasing penalties for desertion in case of a general mobilisation, and the referendums could be used to justify an all-out war towards Ukraine, compared to what Russia continues to call a ‘special military operation’. Russia would likely face several practical challenges with a mass mobilisation, given that implementing martial law would likely be a highly unpopular move among the general public. In any case, it is clear that it would mark a significant escalation in the war in Ukraine. Read our latest take from Research Russia-Ukraine: The underdog has the upper hand now – what’s next? 12 September.

FI: The main event today is the Federal Reserve meeting tonight and whether they will tighten by 100bp rather than 75bp. Currently, the consensus forecast is 75bp, but the risk is clearly a 100bp rate hike given the solid US inflation data and despite the risk of recession. However, the continued front-loading of tighter monetary policy is increasingly becoming the consensus among central banks as shown by the 100bp rate hike by the Riksbank yesterday. Hence, we continue to favour 2-5Y flatterners especially for the Euro swap curve as it is still lagging both US and Sweden, where the 2-5Y curves are significantly more “inverse” as the central banks keep frontloading rate hikes.

FX: Another red day in equity space amid higher yields where US10Y breached 3.50% by a margin pulled EUR/USD below parity, pushed USD/JPY from low to high 143 while NOK and SEK were under pressure through the European session and most of the US session. EUR/SEK dropped instantaneously after the Riksbank but soon reversed while, for instance, further tightening is perceived to have adverse effects on real assets and the economy.

Credit: Credit markets were increasingly negative yesterday with new iTraxx series active, Main going 8.1bp wider to 120.4bp. In addition, Xover was 44bp wider ending the session at 596.8bp.

Danske Bank
Danske Bank
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