Tue, Jun 06, 2023 @ 06:43 GMT
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25bp Fed Hike Expected But Focus on Guidance

Market movers today

Today’s main event is the FOMC meeting where we expect the Fed to hike rates by 25bp, see Fed Preview – Rate hikes continue despite the volatility, 17 March. Consensus seems largely in line with our views as markets are pricing in an 80% probability of a hike. Focus will mainly be on the Fed’s guidance on future moves where the Fed is walking a balance between securing financial stability and fighting still too high inflation pressures. There are differing views among analysts about to what degree the recent turmoil will provide some of the tightening needed to lower inflation and it will be interesting to gauge where the Fed stands on this issue.

UK inflation will be out today and expectations is for 5.7% for underlying inflation compared to 5.8% in January, following the downward trend seen since the peak in October. Services inflation continues to be a risk and is on the radar for the Bank of England (BoE). BoE delivers its rate decision tomorrow meaning that today’s inflation outcome will be an important input. We expect a final 25bp hike up to 4.25% to be delivered.

We also have a flurry of ECB speakers in the calendar at the ECB watchers conference, notably Lagarde at 9:45. Obviously, markets will keep a close eye for any news or headlines regarding banks and systemic risks.

The 60 second overview

‘Risk on’ continued in Asia: With financial turmoil calming down risk appetite rebounded yesterday and the improvement continued in Asian trading overnight. After S&P500 increased 1.2% yesterday, the future eked out a small further gain. Bond yields are broadly flat in overnight trading after rising throughout the day yesterday as risk sentiment improved. Oil and metals prices have also regained some ground. Markets are now awaiting the Fed meeting tonight.

Credit: Yesterday saw some further recovery of the AT1 bond market overall, as investors likely reflected on the comments from European regulators (EBA/ECB/SRB joint statement and BoE) that common equity instruments are first in line to absorb losses before AT1s and that the Swiss approach where common equity holders were prioritised as seen over the weekend is therefore unique. The broader credit market also saw improving sentiment with CDS indices tightening (iTraxx Main by 7bp to 91bp and Xover by 29bp to 472bp.

Xi concludes meeting in Moscow: Chinese President Xi Jinping is concluding his three-day-visit in Moscow. During the visit China’s peace proposal was discussed but also a deepening trade relationship. Xi reiterated China’s “neutral position” at the meeting and it has been flagged that Xi will talk to Ukraine’s leader Volodymyr Zelensky on phone soon. We have doubts that China’s peace proposal will gain traction as it has been widely criticized by the US, and Ukraine and Russia are very far from each other in their individual demands. A key concern that could escalate global tensions has been whether China would deliver weapons to Russia but so far there are few indications of this. NATO Secretary General Jens Stoltenberg said Tuesday that the alliance had seen “some signs” Russia had requested lethal aid from China for the war in Ukraine but so far “haven’t seen any proof that China is delivering lethal weapons to Russia.”

FI: European curves flattened in a rates up move (bear flattening) from the front end. ECB pricing went 27bp higher on the day as no news on the banking turmoil made investors reassess the narrative albeit still waiting for the Fed decision tonight. Markets price 3.41% peak policy rate for ECB, some 40bp higher than the recent lows. German ASW spreads tightening significantly, led by the 5y bobl spread which tightened almost 10bp, but is still 15bp higher than 14 days ago when the turmoil started. After flirting with the 200bp mark, the BTPs-bund spread is trading at 183bp (tightened 3bp yesterday).

Nordic macro

Riksbank Governor Thedéen will speak at 13.10 CET in a panel on technology and climate change at the BIS Innovation Summit. It seems unlikely that he will dwell on current monetary policy or the banking turmoil.

Danske Bank
Danske Bankhttp://www.danskebank.com/danskeresearch
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