Despite the Fed striking a hawkish tone at yesterday’s FOMC meeting, risk appetite has continued to recover. US equities have extended their post-FOMC rally overnight while the USD is broadly weaker, seeing the NZD has push up towards 0.69. Bond yields are little changed. Oil prices have jumped overnight after Russia pushed back against suggestions of progress in peace talks. Domestically, the market pared OCR rate hike expectations after a slightly softer GDP release, with the probability of a 50bps hike in April now sitting just below 50%.
After we went to print yesterday, US equities roared higher into the market close, with the S&P500 and NASDAQ closing 2.2% and 3.8% higher respectively. While the FOMC meeting was unambiguously hawkish (the ‘dot plot’ indicated a hike-per-meeting baseline for this year while a significant minority of the committee appeared to favour a 50bps move at some point), the passing of the event risk appears to have been greeted with relief by investors, triggering a broad-based rally in risk assets. The moves in equities have extended overnight, albeit more modestly, with the S&P500 and NASDAQ both gaining around 1%.
Following encouraging reports of progress in peace talks in Ukraine, Russia has tempered expectations there could be a near-term ceasefire. A Russian government spokesperson said the reports “on the whole, [were] wrong”, while acknowledging that there were “some correct elements”. Biden and Xi are due to speak about Russia and Ukraine today. Oil prices have jumped higher, overnight, by around 8% on Brent crude, but this hasn’t yet rattled broader investor sentiment.
Against a backdrop of improving risk sentiment, the USD has come under further pressure overnight. The BBDXY is down 0.5% 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 follows the USD’s recent strong run which saw the BBDXY index hit an 18-month high earlier in the week.
The NZD and AUD have appreciated significantly overnight, but around 0.8% and 1.1% respectively, amidst broad-based weakness in the USD. The NZD had been trading just above 0.68 immediately prior to the FOMC meeting and it is now approaching 0.69. The EUR is back above 1.11, some 3% off its lows reached earlier this month, despite Russian caution about the prospect of a peace deal with Ukraine.
As universally expected, the Bank of England raised its cash rate by 25bps overnight, to 0.75%, in an 8:1 vote (Deputy Governor Cunliffe voted to keep rates on hold). However, the tone of the statement was more cautious than markets were expecting, with the Bank noting further hikes "might" be needed in the coming months. In February, the Bank said further tightening was “likely ”. Additionally, the Bank said there were risks on both sides and said it would review developments, including the impact of the Russia-Ukraine war at that May meeting, when new forecasts would be published. UK rates have fallen by as much as 12bps at the short end of the curve, while the GBP is the standout underperformer in the FX market overnight, up only 0.1% since 5pm our time.
US Treasury yields have tracked broadly sideways overnight. The US 10-year yield is trading around 2.17%, similar levels to where it was before the FOMC meeting but 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. Powell talked up the economy’s resilience in the press conference, saying it was “very strong” and able to handle tightening.
In the wake of the Fed, the US 5s10s bond curve inverted for the first time since before the GFC. On that last occasion, it wasn’t until the Fed had lifted its funds rate to 4.50% (on its way to an eventual 5.25% peak) that 5s10s inverted. Curve inversion has happened much sooner this time around, causing some to wonder whether this is a potential warning of recession down the line. One difference from 2005, when the 5s10s curve went negative for the first time in that cycle, is that the breakeven inflation curve is deeply inverted this time around; the 10y breakeven inflation rate is 0.6% lower than the 5y equivalent. The US 5s10s real yield curve, at around 65bps, paints a less worrisome picture about the economic outlook.
In China, President Xi said officials should seek to minimise the social and economic impacts of Covid-related restrictions. While China is sticking with its zero-tolerance Covid strategy for now, the comments suggest it might move to a more pragmatic approach in the future. Manufacturing production has partially resumed in Shenzhen, including Apple supplier Foxconn.
In Australia, the unemployment rate fell to a post-1974 low of 4% while employment growth was much stronger than expected, at 77k. With core inflation already in the top-half of the RBA’s 2-3% target range and the labour market exceptionally tight, it’s clearly just a matter of time before the RBA admits the conditions are appropriate for rate hikes and belatedly commences a tightening cycle. The market is pricing an almost 90% chance that the RBA does so by the June meeting.
Turning to local news, yesterday saw the market pare back its RBNZ rate expectations after a slightly weaker than expected GDP release. While the 3% q/q increase in GDP in Q4 was greater than the 2.3% the RBNZ has forecast, the current Omicron outbreak means Q1 is shaping to be much weaker. Receivers returned to the swap curve, with the 2-year swap rate falling 4bps on the day, back to 3%, while the 10-year rate was 2bps lower.
With oil prices having reversed most of their post-invasion moves higher and the government having announced a temporary reduction to excise tax on petrol, which will likely to see a lower peak in headline CPI than previously expected, and now GDP coming in below expectations, the market appears to be coming around to the view that the RBNZ might hike 25bps at the coming meeting. The probability of a 50bps OCR hike in April is now just under 50%, having been above 70% late last week. A 50bps OCR hike in May is still seen as a high chance, around 75%.
The Bank of Japan meets today and is expected to keep its policy settings unchanged while Fed officials Barkin and Bowman are speaking later, the first officials to speak since the FOMC meeting.
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