Fed holds to accommodative stance

• The Federal Reserve maintained its accommodative stance at the March FOMC yesterday, keeping policy rates unchanged at 0.25% on the upper bound and asset purchases steady at USD 120bn/month. The FOMC continued to note that the “path of the economy will depend significantly on the course of the virus” and warned of the health crisis continuing to weigh on economic activity.
• The FOMC did upgrade their growth expectations for 2021 significantly and now expects growth of 6.5% in 2021 compared with 4.2% previously and also sees core PCE inflation at 2.2%, a more modest upward revision to the 1.8% estimated in December. The Fed also improved their projection for unemployment, expecting it to fall to 4.5% by end of year compared with 5% previously. On the Fed’s dot plot projection of future rate levels, seven policy makers now see rates moving higher in 2023 compared with five in December but the median projection remains anchored at current levels. Four policy makers now expect to see rates higher in 2022 compared with just one in the December projections but the takeaway from the statement so far is that the Fed sees no apparent impetus for rates to mover higher in response to the improvements to the economy and particularly in response to higher inflation projections.
• The FOMC statement made no direct mention of the potential stimulatory or inflationary effects of the USD 1.9tn American Rescue Plan or the run-up in market yields or inflation expectations. In his press conference, Fed Chair Jerome Powell doubled down on the message that lower rates were here to stay for the time being and stressed that any tapering would be signposted well in advance. The Fed would not move on improved forecasts, he said, but on an improvement in the data.

• UAE broad money supply growth slowed to 4.4% y/y in January, despite a 0.7% m/m rise.  Quasi-money (FX and long term dirham deposits) contracted on an annual basis for the third month in a row.  Private sector credit growth was little changed at 0.1% m/m and -2.4% y/y in January.  Bank deposits declined -0.4% m/m (+2.7% y/y) as while gross bank lending was flat m/m and up 2.4% y/y in the first month of 2021. 
• Consumer prices in Dubai declined -0.4% m/m (-4.5% y/y) in February, down from -4.4% y/y in January.  Food prices fell -1.2% m/m (-0.4% y/y) while housing & utilities costs declined -0.8% m/m (-9.1% y/y) last month. These two components account for almost 55% of the CPI basket. The only component of CPI to show a m/m rise in price in January was miscellaneous goods and services.
• In New Zealand, GDP contracted by -1.0% q/q in real terms in the previous quarter, missing expectations of 0.2% growth. It was -0.9% smaller than the level seen in the same period in 2019. The risk is now that current restrictions force another contraction in the present quarter, pushing New Zealand into a double-dip recession.

Today’s Economic Data and Events

16:00 Bank of England Bank Rate decision: forecast 0.1%

16:30 US initial jobless claims: forecast 700,000

Fixed income

• Market response to the Fed’s dovish stance mostly played out at the front end and belly of the UST curve with yields declining across the 2yyr – 5yr horizon. The Fed’s commitment to keep policy rates and QE unchanged will weigh on short-term rates and the 2yr UST yield fell almost 2bps to 0.133% at the close. Longer-run yields did manage to increase in line with the Fed’s upward revisions to growth and inflation with 10yr UST yields up 2.5bps to settle at 1.6427%.
• With the Fed actively setting policy to let the economy run hot, the yield curve will have scope for further steepening. The 2s10s spread widened to over 150bps overnight while the 5s30s moved back above 160bps. Steepening yield curves have historically correlated with weakness in emerging market FX rates and while the Fed pushed back on any notion of ‘tapering’ there is still a risk EM assets could see outflows as the 10yr UST remains high.
• EM yields were higher prior to the FOMC statement with South African and Turkish 10yr bond yields up 16bps and more than 7bps respectively. Markets will have several key central bank decisions over the coming days: Bank Indonesia, Norges Bank, CBRT, Bank of England and the central banks in Egypt and Taiwan set policy today. The central banks in Russia and Japan cap off a heavy monetary policy week.

FX

• If treasury markets took the FOMC in their stride, currency markets used it as an opportunity to dump the dollar. Selling against the greenback was widespread and the DXY index fell almost 0.5% to close out at 91.442. Much of the gains came from EURUSD which had its strongest single-day gain since the start of December 2020, adding 0.6% to close at 1.1979. USDJPY also pushed lower, falling 0.15% at 108.84.
• Sterling also managed strong gains against the USD, adding 0.5% to push it to 1.3966 although the Bank of England later today will set the tone for the rest of the week. Trade-oriented currencies rallied sharply against the USD with the AUD and NZD both up around 0.7% in the wake of the Fed while USDCAD extended its move lower for a seventh day in a row.

Equities

• US equity losses pared some of the losses seen earlier in the session in the wake of the dovish FOMC meeting yesterday, and all three major indices ended the day higher. The Dow Jones was the biggest gainer, adding 0.6%, while the S&P 500 and the NASDAQ climbed 0.3% and 0.4% respectively.
• Elsewhere activity was fairly muted ahead of the day’s big event. In Europe, the DAX gained 0.3% but the CAC was flat and the FTSE 100 lost -0.6% on the day. The Shanghai Composite and the Nikkei were both flat yesterday, but Asian markets are seeing robust gains in trading this morning, and those two indices are now up 0.9% and 1.6% so far.

Commodities

• Oil prices extended their losing streak for a fourth consecutive day overnight with Brent futures falling 0.6% to USD 68/b and WTI off by 0.3% at USD 65.60/b. EIA data reported a build in US crude stocks of 2.4m bbl last week, offset by only a modest draw in gasoline and jet/kero. Oil production was stable at 10.9m b/d last week
• The IEA kept its oil demand forecasts for 2021 largely unchanged, expecting total demand growth of 5.5m b/d in 2021 compared with a decline of 8.7m b/d last year. Demand growth will be concentrated in Asia and OECD Americas although China will be the only country’s whose demand is larger by end 2021 than it was before the Covid-19 pandemic took hold. The IEA poured cold water on the notion that oil prices at around USD 70/b was indicative of a new super-cycle in oil and that large amounts of spare capacity and inventories could meet any rapid increase in demand.
• Gold prices reacted strongly to the Fed’s accommodative stance with the yellow metal moving back above USD 1,750/troy oz on the news before moderating gains and recording a 0.8% gain. Metal market response was generally positive to the strong growth projections from the US with copper futures up 1.2%.

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