Sat, Mar 25, 2023 @ 18:17 GMT
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Tighter Monetary Policy – Lower Bond Yields

Market movers today

While markets found Powell’s comments to be on the dovish side yesterday, we expect Lagarde to strike a more hawkish tone today and guide the market towards further hikes in the spring, as the ECB is widely expected to hike its policy rates by 50bp. See our full ECB Preview (26 January).

We also expect the Bank of England to hike the Bank Rate by 50bp, although the hike will likely be accompanied with more dovish communication. Markets are also leaning towards a larger hike with 46bp priced in, see our full BoE Preview (27 January).

Today’s data calendar is thin, US factory orders will be released for December. In addition, the Chinese Caixin Services PMI is due for release overnight, the official PMI released earlier pointed towards a strong uptick in activity.

The 60 second overview

The Federal Reserve hiked rates by 25bp yesterday as expected. Powell sounded more optimistic about the prospects of a soft landing, as inflation figures have begun to ease while the growth outlook has turned less negative. Fed is still looking for ‘ongoing rate increases’ in the coming meetings and no cuts in 2023 in the baseline scenario, but Powell sounded more open to the idea of lowering the policy rate if inflation cools faster than anticipated. The terminal rate pricing was little affected, but markets responded by pricing in even more cuts for late 2023, US Treasury yields declined and EUR/USD reached new cycle highs around 1.10. That said, we still think the current combination of very tight labour markets and the turnaround in the global manufacturing cycle leave Fed with little room to turn more dovish. We maintain our Fed call unchanged, and continue to expect 2x25bp hikes at the March and May meetings. See our full Fed review: Powell sees a higher chance of a soft landing, 1 February.

Today, the ECB and BoE both have their monetary policy meetings where 50bp from ECB seems to be a done deal. QT details should not rock the market. We expect the ECB to continue to sound very hawkish and signal that further rate hikes are coming, in particular giving guidance for another 50bp hike in March. We expect the Bank of England (BoE) to hike the Bank Rate by 50bp. We pencil in an additional 25bp hike in March, now expecting the Policy Rate to peak at 4.25% in March 2023.

Finally, we expect that the Danish central bank will hike some 10bp less than the ECB, such that the gap between ECB and the Danish central bank will be -35bp. However, we acknowledge that is a 50:50 option whether they will widen the policy gap.

FI: The US Treasury market rallied on the back of the FOMC meeting and the comments from Fed Chairman Powell that the disinflationary process had begun. Hence, the market “ignored” the risk that more rate hikes were to come as 2Y yields declined as much as 10Y yields. The focus is now on the ECB and BoE meetings, where we expect both central banks to hike by 50bp.

FX: Markets, including FX, interpreted Powell as dovish and sent EUR/USD above 1.10 for the first time since April last year. Today, all eyes turn towards Lagarde who is expected to be considerably more hawkish, and could thus add additional fuel to the EUR/USD rally. Despite the favourable risk sentiment on the back of Powell, Scandies continue to struggle with NOK and SEK close to cycle highs.

Credit: It was a relatively quiet day in EUR credit markets yesterday as market participants awaited the FOMC decision and CDS indices tightened modestly (iTraxx Main by 1bp to 78bp and Xover by 7bp to 408bp). Nonetheless, the primary market saw some interesting prints with Greece’s Alpha Bank pricing a EUR400m PNC5.5 Additional Tier 1 that attracted some EUR1.7bn of orders. Investors were likely lured by the rare double-digit coupon of 11.875% on offer and reception thus seems testament to the generally strong demand seen this year for higher-yielding deals. Also, Stena was in the market with a new EUR325m 5NC2 senior secured note as part of a tender offer.

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