Below trend growth to continue
Powell comments that 75bps isn’t something the FOMC is actively considering and that 50bps is on the table for the next couple of meetings
Except in Australia and the UK (both for now at least) 50bps is confirmed as the new 25bps, The Federal Reserve following in the footsteps of the Bank of Canada and Reserve Bank of New Zealand in lifting its key policy rate by 0.5% (in the Fed’s case to a target range of 0.75-1.00%). Significantly, Fed chair Powell says 50bps follow-ups are on the table for the next couple of meetings. Most of the market reaction (yields down, USD down, risk assets up) stemmed from this apparent ruling out of 75bps (or larger) future rate rise. In other news, the US ISM services PMI fell slightly against expectations for a small rise, while oil prices are up over 5% on confirmation the EU is looking to ban imports of Russian crude within six months. The Bank of England meets tonight and is widely expected to lift Bank Rate by 25bps to 1.0%
The post-meeting FOMC Statement starts by saying household spending and business fixed investment remained strong (notwithstanding the Q1 GDP dip), that job gains have been robust in recent months and that the unemployment rate has declined substantially. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures, it says. Ukraine is mentioned up top as something that will both weigh on activity and add to upward pressure on prices, while China’s zero-covid policy as likely to exacerbate supply chain disruptions. The Fed is ‘highly attentive’ to inflation risk’ – leaving readers in no doubt where the ‘dual mandated’ FOMC’s current priorities lie. The decision was approved unanimously (so no dissent from James Bullard, who had been making the case for a 75bps rise ahead of the meeting, though also indicating he would defer to the chair).
The announcement of June 1 for the start of QT was, Powell said in the press conference, a case of ‘just pick a date’ with nothing magic about it. This was pretty much as expected, while the decision to start QT with a month cap of $47.5bn ($30bn Treasuries, $17,bn) rising to $95bn in total within three months. This was in line with prior indications.
The highlight of the press conference as far as market reaction was concerned (and faster a relatively subdued reaction to the Statement was Powell’s comments that 75bps isn’t something the FOMC is actively considering and that 50bps is on the table for the next couple of meetings . Powell (said the Fed ‘won’t hesitate’ to go above neutral if needed, though pulled back a little from this assertion later on saying only that it was ‘possible’ we move to a restrictive setting. Semantics maybe. The last (March) FPOMC ‘dot plot, by way of reminder has the ‘long run’ median dot at 2.4% inside a 2-3% range.
With markets well braced for Powell to sound hawkish (which he was) and the Fed delivering no more than was priced into the meeting, it was the apparent ruling out of 75bps future moves that elicited the most post-Fed reaction (bearing in mind Fed Funds futures as of Tuesday’s market close had some 110bps of tightening priced across the May and June meetings combined). 2-year treasury yields are down 14bps on the day and 10s -4bps, so a significant ‘bull steepening’ of the yield curve.
Equity markets also liked the ‘no to 75(ps)’ message, equity markets liked the ‘no 75s’) the NADDAQ just ending the NY day a cool 3.2% higher and the S&P500 by 3%. You might be forgiven though for thinking the Fed had just signalled that it might soon be done tightening (!) though in the context of how much equity markets had fallen in April and the reasons behind it, arguable it is more a case of a market that heavily ‘sold the rumour’ now buying the fact of the Fed’s may actions.
In FX, the across-the board sell-off in the USD has been significant, though the 1% fall in the DXY index should best be seen in the context of the 6% April rally. Given the strong post-Fed risk rally, and the jump in oil prices, it is not surprising that the AUD (+2.25% to ~0.7250 ) has been the best performing major currency in the past 24 hours (and with the lack of any meaningful reaction out of the RBA earlier this week perhaps owing something to FX market inertia in front of the Fed).
NZD is the second best performing of the majors, up 1.7% but which means AUD/NZD is up another 0.5% to 1.1087, its highest since 10 August 2018. RBNZ Governor Adrian Orr is crossing the wires right now, noting the RBNZ was one of the first CBs to start tightening, that he has no regrets on monetary policy and is ‘proud’ of where we are and, in a line borrowed from RBA Governor Lowe on Tuesday, says that ‘it’s now business as usual’ on monetary policy. Whether than means future policy tightening increments will be 25bps not 50bps remains to be seen – probably not is the initial reaction from our BNZ colleagues, rather it means tightening policy to get inflation (and employment) back to where they need to be.
The more than 5% oil price jump comes on conformation that the EU plans to ban Russian crude oil over the next six months, refined fuels by the end of the year and bar European ships from transporting Russian petroleum products. Sources suggest that Hungary and Slovakia, who are more reliant on Russian oil, will be granted a longer timeframe, through to the end of next year. All 27 EU members will need to agree for the plan to progress. If agreed, the question then becomes what will Russia’s response be, and a cut in the EU gas supply would be highly problematic for the region next winter.
In economic news, the US services ISM index fell 1.2pts to 57.1 in April against expectations for a small lift. Like the manufacturing version released earlier this week, supply chain issues and inflationary pressures remained intense. The employment index fell 4.5pts to 49.5, as much a reflection of the difficulty in finding staff than weaker labour demand. Separately, the change in ADP private payrolls for April was weaker than expected at 247k, but that shouldn’t change expectations for nonfarm payrolls at the end of the week, given its non-existent track record in predicting that official figures. The US March trade balance was -$109.8bn versus $107.1bn expected while MBA Mortgage applications were up 2.5% last week, but this is after an 8.5% prior week drop. The trend is sharply down (-47.5% year on year).
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