Yesterday didn’t bring the annoying intraday countdown that often guides trading ahead of a Fed decision. After the recent sharp rise in yields and the selling of risk, investors scaled back recent one-way positioning, regardless of the outcome of the Fed’s decision. Yields corrected to the south. Stocks attempted a cautious rebound. At the beginning of Europe, the ECB announced an ad hoc meeting to discuss current market conditions. The outcome of the meeting was meager. The ECB reiterated the application of flexibility in the reinvestment of PEPP repayments. Staff have been instructed to come up with a new anti-fragmentation instrument. The Italian 10yr spread against Germany initially fell over 40bps and held onto much of that gain even after a disappointing result.

Waiting, weak retail sales in the United States further supported the bond rebound ahead of the Fed’s policy meeting. As expected, the Fed raised the Fed Funds target by 75 basis points to 1.50%-1.75%. In his projections/points, he sees PCE inflation above 2% over the policy horizon (5.2% 2022, 2.6% 2023, 2.2% 2024), with the median policy rate forecast being 3. 4% and 3.8% at the end of 2022 and 2023 respectively. Expected growth is revised down to 1.7% this year and next. The unemployment rate is expected to rise from 3.7% to 4.1%. During the press conference, the Chairman of the Fed recalled that policy must have moved into restrictive territory given the combination of excess demand (also in the labor market) and tight supply. Even so, if the Fed was able to engineer the “Dots Scenario,” Powell said it would be close to a soft landing. On the short-term policy path, Powel expects a 75 or 50 basis point hike in July, but said 75 basis points is not a common move. He saw a rate at 3.0%/3.50% at the end of 2022 and 3.50%/4.0% next year as a reasonable tightening to cool demand. At the press conference, the decline in yields continued, especially after his remarks that 75 basis points is not common.

Finally, US rates fell from 23.6 basis points (2 years) to 9.6 basis points (30 years). Stocks got some relief (Dow +1.0%, Nasdaq +2.50%). The Dollar (DXY) hit a cycle high on the news but fell back to 104.80. In a similar move, EUR/USD reached the 1.10350/65 area, but the 1.0341 support remained unchallenged. The pair closed at 1.044.

Today, the markets will look for a new equilibrium after the Fed. US yields, especially in the longer term, could enter a consolidation pattern. (10 years: 3%-3.5%). The dollar remains nicely bullish, but the pace of gains could slow, especially if equities enter (temporarily?) calmer waters as well. EUR/USD 1.0340/50 remains a key benchmark. The BoE will decide monetary policy. Analysts are expecting a further 25bps upside, but there may be a 50bps external risk, even as domestic demand comes under pressure from falling real disposable income. If the BoE sticks to a 25 basis point step, the pound is likely to remain on the defensive. Also keep an eye on the Swiss National Bank (SNB)

News headlines

The May Australian labor market report was decent, but close to consensus. The unemployment rate stabilized at 3.9%, still the lowest on record. Employment increased by 60.6k after just 4.4k in April (influenced by Easter, school holidays, floods and ongoing Covid disruptions). A positive trend in full-time employment leads to job gains. In May, they increased by 69.4k, offsetting an 8.7k decline in part-time employment. The employment-to-population ratio increased to 64.1%, an all-time high and 1.6 percentage points higher than in March 2020. Seasonally adjusted hours worked rose 0.9%. A separate survey this morning shows consumer inflation expectations rose from 5% to 6.7% in June, the highest level since 2008. AUD/USD is trying to hold above 0.70, after yesterday’s impressive rebound (from 0.6850) amid a more relaxed global backdrop.

New Zealand recorded negative GDP growth in the first quarter (-0.2% Q/Q) coming from a 3% growth in the last quarter of last year and below consensus 0.6% Q/Q. Net exports are responsible for the decline with exports down 14.3% Q/Q and imports down 2.8% Q/Q. Service export fell 24.8% Q/T and remains heavily impacted by the pandemic and continued border restrictions. Household spending held up (+4.6% Q/Q) and was driven by spending on services. Real gross national disposable income fell by 0.5% Q/Q, reducing consumer purchasing power. Investments in fixed assets increased by 1.2% Q/Q, but showed a mixed picture at the sector level. NZD/USD followed yesterday’s global move, rebounding from 0.62 support towards 0.63...

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