Seldom the day of a Fed decision yielded as little news for markets and analysts as was the case yesterday. The Fed policy decision annex press conference hardly caused any ripples. As expected, Powell and Co in an unanimous vote raised the target range for the Fed Fund rate by 25 bps to 5.25%/5.50%. The Fed policy statement was an almost exact copy from the June text. At the press conference, Chair Powell had only one message: the Fed entered a completely data dependent mode. There is still a way to go for to reach its 2.0% goal in a sustainable way, but a decision on additional tightening will be made on the basis of upcoming data, with the Fed chair especially mentioning two CPI releases and payrolls reports and the Employment Cost index as key pointers in the Fed’s decision making process at the September meeting. The Fed still ‘excludes’ rate cuts this year. The reaction, especially in interest rate markets, was close to non-existent. Except for the 5-y (benchmark change -5.15 bps) daily changes in the US yield curve were less than 2.5 bps. In this respect, there was more movement in German/EMU yields after recent data-driven bond rally. Investors took some chips off the table going into today’s ECB policy decision with German yields rising between 7.3 bps (5-y) and 5.5 bps (30-y). US equities showed some swings around the Fed press conference, but at the end of the day closed little changed (S&P 500 -0.02%). Powell seeing a growing chance of a soft landing of the US economy after all was a fairly constructive message for equities/risk assets. This constructive assessment maybe also slowed recent bid for the dollar. DXY eased to close below the 101 level. EUR/USD also rebounded to close at 1.1086, just below the 1.1095 technical reference. The yen still slightly outperformed the dollar and the euro (close at 140.25 and 155.48 respectively).
Asian equity markets this morning apparently feel comfortable with yesterday’s Fed-message with most indices in green. US Treasuries are gaining marginally. De dollar is little changed. Later today, the ECB policy meeting to a large extent might follow the scrip of yesterday’s Fed meeting. Anything different from a 25 bps hike would be a huge surprise. At the ECB press conference, chair Lagarde probably will get many questions on recent poor activity data. However, with (core) inflation still at 5.5% we expect the ECB chair to reiterate its commitment to get inflation back under control. As did Powell yesterday, Lagarde will keep all options open for the September meeting (and beyond), probably with some warnings against too soft market positioning/expectations. Given the Fed’s data-depended approach, markets also will keep a close look at the US eco data, including the first estimate of the US Q1 GDP (expected at 1.8% Q/Qa). The core PCE deflator is expected to ease from 4.9% to 4.0%. US durable goods orders are a volatile series, but weekly jobless claims (expected at 235k) recently often also had an impact on the intraday price dynamics. Given current market pricing only discounting a probability of less than 50% for an additional Fed rate hike, upward surprises might support US yields. In FX markets, the dollar rebound lost some momentum. In EUR/USD the 1.1021/1.10 area remains first ST support.
News and views
Advisors to the UK chancellor Hunt become increasingly concerned that the Bank of England is overdoing it in the fight against inflation. A majority worries that rapidly rising rates will topple the economy in a recession just as the country is headed towards elections next year. Their view is being taken seriously by top Treasury officials, especially after June UK (core) CPI showed a bigger-than-expected decline. It was the first such positive surprise after four consecutive negative ones though. Some members in the advising panel think the BoE feels public pressure to tighten further because of criticism that it was too slow to move at the start and some, including former BoE governor Haldane have publicly called on the central bank to pause. The UK Treasury in a statement yesterday highlighted that the advising committee’s view does not necessarily reflects the views of government. It stressed that monetary policy is the responsibility of the Bank of England’s MPC and that it is committed to that. The discussion comes ahead of the central bank’s August 3 meeting. Markets expect a 25 bps rate hike (to 5.25%) at a minimum, with a 50% chance discounted for another 50 bps move.