Fed begins hiking cycle

• The Fed raised the benchmark Fed Funds rate by 25bp as expected to 0.25-0.5%, with one FOMC member (James Bullard) voting for a 50bp rate hike. The statement confirmed that rates would rise further, with the dot plot signaling a further six 25bp rate hikes this year, although Chairman Powell noted that a 50bp rate hike remained a possibility.  He described the US as very strong and the labour market as “extremely tight”.  Balance sheet reduction will start at a coming meeting and could be equivalent to another rate hike this year, according to Powell.  
• The new economic projections showed a downward revision to GDP growth this year to 2.8% from 4.0% in the December projections, and a further slowdown to 2.2% in 2023. Inflation expectations for 2022 were revised sharply higher to 4.3% (2.6% previously) before easing to 2.7% in 2023. Unemployment is still expected to fall to 3.5% by the end of this year and remain there through 2023.
• The dot plot showed the median forecast for the Fed Funds rate at 1.875% by the end of this year (implying an upper bound of 2%), rising to 2.75% in 2023 and 2024.  This implies at least another three rate hikes next year. However, the FOMC's median estimate of the long run policy rate was lowered from 2.5% to 2.375% suggesting that most members see slower growth and lower inflation once the current supply chain and pandemic-related inflation has passed. There is a wide range for rates projections both for this year and next with the 2022 outlook showing 1.4% at the bottom end and more than 3% at the top while in 2023 the range extends from 2.1% to 3.6%. The divergence in views suggests that the Fed’s outlook on inflation and the appropriate policy response may not be strongly unified.
• Most GCC central banks including the UAE, Saudi Arabia, Kuwait and Bahrain have already announced they will increase their benchmark rates by 25bp in response to the Fed’s rate hike on Wednesday. Oman and Qatar are likely to follow suit today.
• In other data, US retail sales in February rose by a slower than expected 0.3% m/m although the January reading was revised higher to 4.9% from 3.8% previously. Excluding autos and gas, retail sales declined -0.4% m/m in February, well below expectations for a 0.4% gain. This suggests that higher fuel prices are resulting in weaker spending on discretionary items.
• Ratings agency Fitch said it expects the Egyptian central bank to raise rates at next week’s meeting and that an IMF programme may be needed to shore up its external position. Inflation is likely to rise as global food prices have increased, with Egypt typically importing most of its wheat from Russia and Ukraine.

Today’s key economic data releases and events

14:00 EC CPI (Feb) forecast 0.9% m/m and 5.8% y/y

16:00 Bank of England rate decision – forecast 25bp rate hike to 0.75%

16:30 US housing starts (Feb) forecast 1700k

16:30 US initial jobless claims (12 Mar) forecast 220k

16:30 US capacity utilization (Feb) forecast 77.9%

Fixed Income

• The hawkish tone from the Federal Reserve at the start of rate hiking cycle helped to push benchmark bonds lower as the Fed lines up a potentially aggressive tightening phase. Yields on the 2yr UST jumped almost 9bps overnight to settle at 1.9379%, pulling back somewhat after having picked up to almost 2%. The 10yr yield added 4bps to close at 2.1849%. Fed chair Jerome Powell appeared to commit the Fed to hikes at all subsequent meetings which would take the Fed funds rate to 2% on the upper bound by the end of the year, in line with our expectations.
• European bond markets were already weaker ahead of the Fed and we would expect them to catch up with wider moves later today. The Bank of England will be in focus today with expectations for a third 25bps hike in the Bank Rate to 0.75%. 

FX

• The dollar softened overnight as the Fed’s move came in line with market projections, albeit on the hawkish side. The broad DXY index fell nearly 0.5% to 98.618 with EURUSD showing solid gains of 0.7% to settle at 1.1035. USDJPY continued to move at the expense of the yen, however, with the pair closing up 0.36% at 118.73. GBPUSD bounced strongly, up 0.8% at 1.3149 with eyes on the Bank of England later today.
• Commodity currencies closed up strongly. USDCAD closed at 1.2677, down 0.7% in favour of the loonie even as oil prices encounter some difficulty holding on to recent elevated levels. AUDUSD closed up 1.3% at 0.7290 while NZDUSD closed up 1% at 0.6838.

Equities

• Asian markets got the day off on the front foot yesterday, after moves by the Chinese authorities to assuage investors’ concerns over strengthening regulations amidst a tech crackdown boosted investor appetite. Chinese tech stocks have performed particularly poorly over the past week, with the Covid-19 outbreak and lockdown in Shenzen also weighing on sentiment, but shares surged following the announcement yesterday. The Shanghai Composite closed up 3.5%, while the Hang Seng, which had fallen to a six-year low, rose 2.6%. Elsehwere, the Nikkei added 1.6% while in India both the Nifty and the Sensex closed 1.9% higher.
• European markets opened higher later in the day and closed up at the end of the session, buoyed by falling oil prices and a glimmer of optimism with regards peace talks between Ukraine and Russia. The FTSE 100 added 1.6%, the CAC 3.7% and the DAX 3.8%.
• In the US, equities moved strongly higher also despite the start of the tightening cycle, likely boosted by Jerome Powell’s characterisation of the economy as very strong. The Dow Jones (1.6%), the S&P 500 (2.2%) and the NASDAQ (3.8%) all closed higher.

Commodities

• Oil prices moved lower for a third day running, down 1.9% in Brent at USD 98.02/b while WTI fell by 1.5% to USD 95.04/b. Both are nudging higher in early trade today however. Anxiety over the spread of Covid-19 in China is weighing on the near-term demand outlook even as there are still substantial supply risks related to the war in Ukraine.
• Commercial crude inventories in the US rose by 4.3m bbl last week, including a 1.8m bbl increase at the Cushing, OK pricing point. In the products market there were draws across much of the barrel with gasoline stockpiles down by 3.6m bbl while distillate inventories were up slightly. US oil production held steady at 11.6m b/d while product supplied dipped back by 558k b/d to 20.65m b/d.
• The IEA warned of a potential energy supply crisis caused by Russia’s invasion of Ukraine in its March monthly oil market report. The agency noted that only Saudi Arabia and the UAE had the ability to increase production to compensate for a drop in Russian oil production and exports but that neither country had so far committed to higher output. The IEA has cut its demand growth expectation for 2022 by 1m b/d as consumers pare back on demand thanks to high and volatile energy prices though based on their current projections, oil market balances will show a persistent deficit for much of 2022.

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