March 18, 2022

Markets Today: BoE far more cautious than the Fed

Russia makes USD bond payments, adding to a sense of hope on Russia/Ukraine

Todays podcast

Overview Blue Sky Mine

  • Russia makes USD bond payments, adding to a sense of hope on Russia/Ukraine
  • Risk appetite continues to lift despite the hawkish FOMC: S&P500 +0.8% so far
  • USD fall continues with DXY -0.6%; AUD outperforms +1.8% to 0.7374
  • US yields extend post-FOMC rise with 10yr +1.6bps to 2.20%
  • BoE does a dovish hike, sending Gilt yields lower and GBP underperforms
  • Coming up today: very quiet, BoJ & JN CPI, EZ Trade Balance, Fed Speakers

“Hey, hey-hey, hey; There’ll be food on the table tonight; Hey, hey, hey, hey; There’ll be pay in your pocket tonight”, Midnight Oil, 1990


Risk appetite has continued to lift despite the hawkish FOMC meeting on Wednesday. US equities have extended their post-FOMC rally with the S&P500 +0.8% into the last hour of power, while the USD is again weaker with DXY -0.7%. Adding to the positive tone was Russia making a USD bond payment, avoiding default, and adding to a sense of hope despite the Kremlin pushing back overnight on the degree of progress in peace talks. Importantly talks continue and there are also reports that Turkey is working to set up a meeting between Putin and Zelenskyy, while Biden and Xi are also set to meet today. In the UK a dovish 25bp hike by the BoE (one dissenter and a moderation in language to further hikes “might” be needed in coming months, from the “is likely ” previously) has seen Gilt yields fall with the 10yr -6.5bps to 1.57%, while a sharper 16bps has come off rate hike pricing in 2022. US yields extended their post-FOMC rise with the 10yr up 1.6bps to 2.20% and a further 6.5 hikes are priced for 2022. Commodity prices have risen, partly on the back of the Kremlin headlines with Brent Oil +9.3% to 107.16.

Why the risk positive tone after the hawkish FOMC meeting? Equity analysts are reconciling it by Powell’s language on wanting to engineer a soft landing, and that even with 7 hikes in 2022, real yields will still be negative given the Fed’s median forecast of core PCE inflation at 4.1% against a Fed funds rate of 1.9%. Also in the background is the sense of positivity around Russia/Ukraine, despite the ongoing war. Key to that positivity overnight was Russia making USD payments on its bonds (holders of two Russian dollar bonds said coupon payments arrived Thursday). The importance of the payment cannot be understated as it indicates that the exceptions that were setup on the sanctions on Russia are holding and may indicate a willingness by firms to allow other transactions such as energy. Reuters reports JPMorgan was the correspondent bank Russia used to send the payment to Citigroup, which is acting as payment agent on the bonds. JPMorgan sent the money to Citigroup after it sought and received the required approvals from US authorities on Wednesday (see Reuters: Some Russia creditors have received dollar bond payment -sources).

As for the Russia/Ukraine talks themselves, the Kremlin reportedly dismissed news of progress. A Kremlin spokesman said an FT report that reported “significant progress” on a peace plan were “on the whole, wrong”, while acknowledging that there were “some correct elements”. Meanwhile oil prices have jumped overnight, by around 9% on Brent to 107.16, but this hasn’t rattled broader investor sentiment. Part of the recovery in broader commodity prices comes as China seeks to minimise the impact of Covid-restrictions. Shenzhen which is under lockdown is allowing manufacturing to resume, including for key Apple supplier Foxconn. The move highlights a very gradual pivot to a more pragmatic. The Global Times hints at a pivot: “China is also making great strides toward what epidemiologists call “scientific and pragmatic” adjustment in fighting the virus, as it updated its COVID-19 playbook on Tuesday, ordering COVID-19 patients with mild symptoms to go to centralized quarantine facilities instead of hospitals, and lowering the requirements for patients to be discharged from hospitals” (see Global Times: Xi orders swift containment of virus, sticking to dynamic zero-COVID).

The BoE met overnight, with a dovish hike seeing UK rates fall with the 10yr yield -6.5bps for to 1.57%. While the BoE did hike rates by 25bps to 0.75%, there was one dissenter (8 vs. 1; Deputy Governor Cunliffe voted to keep rates on hold). The Statement was also more cautious than markets were expecting with the MPC softening the rates outlook to further hikes “might ” be needed in coming months, down from the “is likely” characterisation previously. The concluding paragraph read: “the Committee judged that some further modest tightening in monetary policy might be appropriate in the coming months, but there were risks on both sides of that judgement”. Cunliffe who dissented in favour of holding noted “…the very material negative impacts of higher commodity prices on real household incomes and activity” with “such impacts on activity and employment would push against domestic inflationary pressures ”. The BoE said it would review the impact from Russia/Ukraine ahead of the May MPC meeting. Markets pared end 2022 Bank Rate pricing by 16bps, though there is still a further 4.9 hikes priced for 2022. (see BOE: Monetary Policy Summary, March 2022).

Against a backdrop of improving risk sentiment, the USD has come under further pressure. The DXY is down 0.6% over the past 24 hours, extending its post-FOMC falls.  The negative USD reaction to what was a very hawkish FOMC meeting is somewhat surprising, although it comes amid hopes around Russia/Ukraine. The AUD (+1.8% to 0.7379) and NZD (+1.2% to 0.6886) have appreciated significantly amidst broad-based weakness in the USD, as well as higher commodity prices in the background. The EUR is near 1.11 at 1.1094 , some 3% off its lows reached earlier this month. GBP was also up 0.5% despite the dovish rate hike with the earlier fall having reversed.

As for US yields, they extended their post-FOMC rise.  The US 10-year yield rose 1.6bps to 2.20% and importantly is around 50bps higher than the lows reached less than a fortnight ago. The 2-year rate is around 6bps higher than its pre-FOMC levels, at around 1.94%. The market is placing 40% odds on a 50bps Fed at the next meeting in April and there are 6.5 further hikes priced in 2022. Powell talked up the economy’s resilience in the press conference, saying it was “very strong” and able to handle tightening. Nevertheless , the very fact Chair Powell was asked about recession risk on the very first rate hike suggests many are fearing the Fed will overtighten. Former Treasury Secretary Summers noted recently “given the current inflation level of nearly 8 percent and unemployment below 4 percent, historical evidence suggests a very substantial likelihood of recession over the next year or two” (see Summers: History Suggests a High Chance of Recession over the Next 24 Months). Eurodollars and OIS continue to show slight inversion after September 2023, while the 5s10s curve inverted for the first time since the GFC on

In Australia, yesterday’s fall in the unemployment to 4.0% emphasises that RBA rate lift-off in 2022 is now just a matter of time. Unemployment fell two tenths to 4.0%, its equal lowest in the history of the monthly survey that dates back to 1978 (consensus 4.1%, NAB 4.0%). You have to go back to November 1974 in the prior quarterly survey to find a lower unemployment rate! Employment was also strong, up 77k (consensus +37k, NAB +50k), which meant the unemployment rate fell even with the participation rate increasing two tenths to 66.4%. Importantly labour demand remains strong even with the unemployment rate at its lowest level since 1974, which means the unemployment rate should fall below 4.0% as soon as next month. Indeed, some segments of the labour market are already there with the female unemployment rate at 3.8%, and NSW having an unemployment rate of 3.7%. Note the RBA had only forecast unemployment drifting below 4% in Q3 2022. Markets currently price the first 15bps hike in June and there are 5.2 hikes priced for 2022.

Across the ditch in NZ, the market pared OCR rate hike expectations after a slightly softer GDP release (3.0% q/q against 3.3% expected), with the probability of a 50bps hike in April now sitting just below 50%, having been above 70% late last week. A 50bps OCR hike in May is still seen as a high chance, around 75%. It seems with oil prices having reversed most of their post-Russian/Ukraine moves, the government having announced a temporary reduction to excise tax on petrol, and GDP coming in below expectations, the market is coming around to the view that the RBNZ might only hike by 25bps at the coming meeting.

Coming up today:

Domestically there is no data scheduled. Offshore the BoJ meets and there is also a smattering of Fed speakers. Details below:

  • JN: BoJ & CPI: The BoJ meets today with the consensus for no change. CPI figures are also out in February with core expected to be -1.0% y/y.
  • EZ: Trade Balance: Unlikely to be market moving, consensus is for -9bn.
  • US: Fed Speak and Existing Home Sales: Three Fed speakers are scheduled tonight, including Barkin, Bowman and Kashkari. Existing Home Sales are expected to fall sharply -6.2% m/m after the prior months +6.7%.

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