In line with our expectations, the FOMC meeting turned out to be a “buy the rumour, sell the fact” event for the USD. DXY depreciated 0.9% to 102.51, its lowest level since 26 April. The US Treasury 2Y yield fell 14 bps to 2.642% after the Fed delivered the well-telegraphed 50 bps hike to 1% and plans to reduce the balance sheet from 1 June. Despite the guidance to follow through with 50 bps hikes at the next two meetings, Fed Chair Jerome Powell said the Fed was not “actively considering” stepping up the pace of hikes by 75 bps. Investors cheered, and the Dow, S&P 500 and Nasdaq Composite rallied 2.8%, 3.0% and 3.2% respectively. Powell also affirmed that the committee estimated the neutral rate as 2% to 3% which should cap the 10Y bond yield at 3% and provide relief to Japanese officials fretting about excessive JPY weakness.
US markets are likely to be more data-dependent between now and the next FOMC meeting on 15 June. Tomorrow, US nonfarm payrolls might surprise on the downside. Yesterday, the ADP Employment Survey reported that 247k jobs were added in April, fewer than the 383k consensus and the 479k reported in March. The employment index in the ISM Services PMI fell to 49.5 in April, below the breakeven 50 level for the second time in three months. While employment in the manufacturing PMI remained positive, it did drop from 56.3 in March to 50.9 in April, its lowest level since September. Starting tomorrow, Fed officials will be lining up to speak with the narrative balancing between the Fed’s commitment to rein in inflation and its desire for a soft landing that Powell has described as looking “softish”. We see DXY consolidating between 102 and 104 for now and will consider a deeper correction if the focus shifts from the Fed to other central banks.
GBP appreciated 1.1% to 1.2631, above 1.26 for the first time since 25 April. The Bank of England meets today and is not expected to buck the tightening trend to fight inflation. Expect the committee to lift the bank rate a fourth time by 25 bps to 1%, its highest level in 13 years. Despite recession talk, CPI hit a 30-year high of 7% YoY in March amidst a two-year unemployment rate of 4.3% in March. Core inflation was also high at 5.7%, significantly above the 2% target. Two weeks ago, BOE Governor Andrew Bailey voiced concerns over persistent inflationary pressures, noting the labour market might stay tight for longer despite growth risks. Hence, GBP could correct up more to 1.27-1.28 if the BOE joins the Fed and other major central banks in becoming more duty-bound to rein in inflation. The market appears to agree and sees the BOE bringing rates above 2% a year from today.
Quote of the day
“Whenever you find yourself on the side of the majority, it is time to pause and reflect. ”
Mark Twain
5 May in history
Willie Mays hit his 512th home run in 1966.
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