March 17, 2022

Markets Today: A far from transitory Fed

US Fed lifts cash rate 25bps, as expected

Todays podcast

Overview The Time Has Come

  • US Fed lifts cash rate 25bps, as expected
  • Dot plot moves higher, median for 7 hikes this year
  • 2yr yields surge on FOMC and curves flatten
  • That’s against a broader risk positive backdrop
  • AUD up 1.4%, equities higher
  • AU Employment and NZ GDP today, BoE tonight.

The time has come, To say fair’s fair, To pay the rent, To pay our share – Midnight Oil


The Fed lifted rates by 25bps in a widely telegraphed first move while the accompanying statement and dot plot were hawkish, with a hike per meeting in the median dot for 2022. St Loius President dissented in favour of a 50bp hike. The Statement notes the invasion of Ukraine likely adds to inflation and weighs on growth. Inflation forecasts were revised higher to end 2022 at 4.3% and slow to 2.7% by end 2023. Stocks initially pared gains, but rebounded as Powell’s press conference emphasised that the economy was strong enough to withstand hikes, saying he wasn’t concerned by the possibility of a recession in the next year with the economy strong and the labour market tight. More details on balance sheet reduction to come.

US yields jumped on the decision, the curve flattening sharply on a lift in 2yr yields. US 2yr yields rose sharply on the hawkish tilt in the statement and projections, briefly jumping as much as 12bps to a high of 1.9956 before settling back to 1.9338; the 2yr-10yr spread falling to 25 basis points. The USD is down 0.7% on the DXY on the broader risk-on backdrop. The AUD is up 1.4% to 0.7295 after more than retracing a dip down to 0.7206 after the FOMC.

Ahead of the Fed, risk appetite was positive. China signalled support for financial markets and growth, while Russia suggested a neutral, but still armed, Ukraine could be a compromise. Chinese officials said they would “coordinate pandemic prevention and control and economic development, keep the economy operating within a reasonable range and keep the capital market running smoothly ,” according to a report by Xinhua, easing concerns and setting the stage for a recovery in Chinese tech stocks. Equity markets initially pared gains on the FOMC decision but rebounded during the press conference. The S&P500 was up around 1.5% going into the last hour of trading. The NASDAQ was up 1.4%, while the Hang Seng rose 9.1%.

Powell’s press conference made no effort to hose down expectations for further rate rises, but noted that “the American economy is very strong and well positioned to handle tighter monetary policy,” Repeating that policy will be nimble, he added “we are attentive to the risks of further upward pressure on inflation and inflation expectations.” The statement noted the Committee “ expects to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities at a coming meeting”. Powell elaborated that “excellent progress” has been made on the plan, which could be announced as soon as May, with the balance sheet reduction to be faster than last time and a more detailed discussion contained in the Minutes for today’s meeting.

As for the outlook, the median dot now shows 6 additional rate rises to 1.75-2.0% by the end of 2022 (a 25bp hike per meeting), against 3 hikes in 2022 at the December Summary of Economic Projections. Matching market pricing going into the meeting but more hawkish than surveyed economists were expecting. The upward shift in the dots continues over 2023, with 3-4 more rises to 2.75 in 2023 (from 1.5-1.75 in December). The 2024 median is also at 2.75 while the longer run median is now 2.375. So the median dot sees rates get to above their longer run level by the end of 2023 and sustain there through 2024.

On Russia-Ukraine developments , glimmers of progress amongst competing developments. the FT reported significant progress on a tentative 15-point peace plan between Russia and Ukraine, though a Zelensky aide tweeted they represent nothing more than Russian requests. A Kremlin spokesperson indicated a possible compromise could be a neutral Ukraine that had its own army. Ukrainian President Zelensky pressed US lawmakers for additional military assistance in a speech to Congress. President Biden announced $800 million in new military assistance to the Ukraine government, on top of $200 million unveiled on Saturday. Ahead of the Speech Ukraine said it had launched a counteroffensive on Kyiv and other cities.

Data flow took a back seat overnight. Total US retail sales rose 0.3% m/m in February, marginally below the 0.4% consensus, while sales ex autos rose just 0.2% against expectations for a 0.9% consensus. Upward revisions to the January readings, though, more than outweigh the weaker-than-expected monthly growth figures. Canadian CPI hit 5.7% y/y, above expectations for 5.5% and the highest since August 1991. The numbers doing nothing to dissuade expectations that the Bank of Canada will continue a rate-hike cycle at the next policy meeting on April 13.

Coming Up

  • Australian employment data the focus domestically today. Another strong print is expected with NAB forecasting the unemployment rate to fall 2 tenths to 4.0% on the back of a 50k gain in employment (consensus 4.1/37k). With labour demand indicators still very strong, NAB sees the unemployment rate moving below 4% in coming months, and again outperforming the RBA’s forecasts which at February only saw this occurring by Q3 2022.
  • Across the Tasman, NZ Q4 GDP data is published this morning. Our BNZ colleagues look for a rebound of 3.2%, from the 3.7% drop in Q3 that reflected the “Delta lockdowns”. The RBNZ, in its February MPS, anticipated a gain of 2.3%. Though given the turbulence since Q4 the numbers will receive less attention than usual.
  • The Bank of England meets tonight. The market is well priced for a 25bp hike, with some chance of a larger 50bp hike. Also coming up, Lagarde is back on the speaking circuit, as are no fewer than four of her ECB colleagues at various forums overnight.

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