Chinese government shows support for economy and stockmarket. Fed delivers 25bps hike and hawkish rate projections, with 7 hikes this year and a chance of 50bps moves

Risk appetite increased after the Chinese government showed its support for the economy and stockmarket and some positive mood music around peace in Ukraine.  Global equities showed strong gains and global bond rates were broadly higher, ahead of the Fed’s policy update. A hawkish statement and a ramping up of rate hike projections saw US equities pare gains, while the US Treasury curve bear flattened. The NZD and AUD pared overnight gains after the Fed statement.

At 7am the FOMC released it policy update and lifted the Fed Funds rate by 25bps to a range of 0.25-0.5%, as widely anticipated and marking the first rate hike since 2018. St Louis Fed President Bullard dissented, arguing for a 50-bps hike at this meeting. The accompanying statement was hawkish, alluding to the strong labour market and elevated inflation pressures. The committee said that ongoing increases in the Fed Funds rate will be appropriate and the median member projected a 25bps hike at every meeting this year, or seven hikes in total. On quantitative tightening, the Fed said it expects to begin reducing its holdings of Treasuries, agency debt and MBSs at a coming meeting.

Adding to the hawkishness of the Fed, there were seven members whose median projection for the Fed Funds rate was above 1.875%, meaning that at a future meeting they think a 50bps move would be appropriate. The median sits at 2.75% for both 2023 and 2024, above the longer-run neutral estimate which was revised down a touch to 2.375%. So the dot plot reveals a desire from the Fed to get a move on with rate hikes, with the increased inflationary backdrop requiring a more aggressive tightening cycle than previously indicated.

Global rates were already higher leading up to the Fed announcement, but the hawkish statement saw further increases, led by the short end of the curve. The 2-year rate currently sits 14bps higher, close to 2%, while the 10-year rate is up 9bps for the day to 2.24%.

Ahead of the Fed announcement, markets were trading with a positive risk tone, supported by optimism on eventual peace in Ukraine (see below) and the Chinese government’s support for the equity market. The Euro Stoxx 600 index closed up 3.1%.  More than 1% gains for the S&P500 have been pared back since the Fed announcement, with the index falling towards flat as we go to print.

Ahead of the Fed, there was a risk-on tone to currency markets, with the NZD and AUD recovering overnight and with the USD, CHF and JPY underperforming.  Since the Fed, the USD has recovered and the NZD has gone from trading above 0.68 to below. We won’t dwell on market movements as these could all change as Fed Chair Powell delivers his post-FOMC press conference.

The FT reported that Ukraine and Russia have made significant progress on a tentative 15-point peace plan including a ceasefire and Russian withdrawal if Kyiv declares neutrality and accepts limits on its armed forces. The report also said that Ukrainian officials remain sceptical President Putin is fully committed to peace and worry that Moscow could be buying time to regroup its forces and resume its offensive. Putin showed no sign of compromise on Wednesday, vowing Moscow would achieve all of its war aims in Ukraine.

Russian Foreign Minister Lavrov indicated there’s some hope for compromise, saying that Moscow’s demands for Ukraine’s neutrality are under serious discussion, although the talks aren’t going easily. After another round of talks an advisor to Zelensky tweeted that there were “fundamental contradictions” in the talks, but there was certainly room for compromise. Hopes for peace in Ukraine helped oil prices to sustain the move lower seen yesterday, with Brent crude hovering below the USD100 mark.

The Chinese government has evidently had enough of watching the country’s equity market tumble, with a committee chaired by Vice Premier Liu He issuing a wide ranging statement that signalled measures to boost the economy, offer regulatory relief for investors, proactive monetary policy, appropriate new loan growth and “safeguard capital market stability with firm confidence”. The market understood the message and this saw the CSI-300 index close the day 4.3% higher, the battered Hang Seng index rose a massive 9.1% and supported CNY. Overnight, US-listed Chinese stocks exploded higher, with the Nasdaq Golden Dragon China Index up over 25%.

On the economic data front, US retail sales were weak in February, with the ex-autos and gas core figure falling 0.4% m/m, well below expectations, but this followed an upwardly revised surge higher in January.  The net result will be a strong Q1 figure overall, even if March is soft as well, and the Atlanta Fed’s GDPNow estimate lifted from 0.5% to 1.2% after adding in the retail sales report. Homebuilder sentiment measured by the NAHB housing market index underwhelmed, falling to a six month low of 79, and this should continue to fall on the back of rising mortgage rates.

Canadian annual CPI inflation hit a three-decade high of 5.7% y/y, with the figure, alongside an average core increase of 3.5% y/y both higher than expected. The data added to the case for a series of rate hikes by the Bank of Canada, with the market pricing in a better-than-even chance of a 50bps hike at the next meeting in April.

The NZ bond market had a poor session, with NZGB’s underperforming swaps, with rates up 2-4bps across the curve and particular selling pressure around the 10-year part of the curve. By contrast, swap rates fell 2-3bps. Offshore interest in NZGBs has been lacking, given the backdrop of war in Ukraine and global volatility. NZ’s current account deficit blew out to over $20b in the year to December, to 5.8% of GDP and could reach 7% before it begins to turn lower.

NZ Q4 GDP due today is expected to show growth of over 3-3½% q/q, well ahead of the RBNZ’s estimate of 2.3%. But the data are dated and Q1 is shaping up to be much weaker than the RBNZ thought, and negative growth can’t be ruled out, so this should moderate any market reaction to a strong release. The Australian employment report is expected to be robust, with strong employment driving the unemployment rate down to new cycle-low of 4.1%. The market is well priced for a 25bps hike from the Bank of England tonight, with some chance of a larger 50bps hike. Over six rate hikes are priced in this year and the market will be interested in how much the BoE pushes back on this. US data releases tonight are second-tier.