Biggest hike from the Fed since 1994

The much-anticipated Fed meeting ended with the FOMC raising U.S rates by 75bps (to 1.50 -1.75%) yesterday evening, and saying that a further 75bps hike is possible at the July meeting. That 75bps hike represents the biggest such move by the Fed since 1994, as they attempt to tame rampant U.S inflation. It is also the first time that we can remember in a while that the Fed have ignored their own forward guidance, which had been 50bps. In fairness to the Fed, that was all prior to the latest inflation print.

What did the markets think?

There was a decent rally for markets, with the major indices marking gains around the 2% region on the session, as a relief rally quickly ensued. The fact that the Fed appear to be front-loading rate hikes is really what triggered the market rally. Currency moves were somewhat more subdued, however, with the dollar index slipping back to 104.50. USD/JPY slipped back to 134.00, having hit an interim high at 135.60.

Retail slows

Ahead of that FOMC announcement, there was a noticeable miss for the latest U.S Retail Sales, with a -0.3% (MoM/May) reading, which was well below the 0.2% gain expected, perhaps reflecting a more cautious consumer, given surging inflation. There was a noticeable drop in auto sales during the period.

A plan to make a plan

The ECB called an unexpected emergency council meeting yesterday, sparking fever-like excitement amongst markets. We do love an emergency meeting. Yields on government bonds for the more indebted nations in the region have risen sharply over the past 5 months, with the likes of the Italian 10-year government bond yield rallying from 1% at the tail-end of last year, to over 4.2% this week, as bond prices lead markets lower. This has sparked much concern amongst the powers that be at the ECB, and the emergency meeting was expected to finish with the ECB making some key announcements, in response to that jump in borrowing costs.

An opportunity missed

In the end, there was no emergency rate hike, or additional programmes, rather just an announcement that the ECB have told staff to prepare a new ‘anti-crisis’ tool for approval, which was a complete anti-climax. In effect, the ECB have now told us that they have a plan to come up with a plan. Given that yields initially dropped, before rallying after, it seems as though it was an opportunity missed by the ECB, as amongst other measures, they could have used the window to hike interest rates in the region.

What did the EUR do?

Move around a lot, to be fair. Initially, there was a strong rally for the single currency as markets contemplated all manner of outcomes from the ECB meeting, with EUR/USD quickly ascending back above 1.0500. However, the disappointing outcome ignited a reversal (and some), with the pair moving back under 1.0400 before bouncing once again after the Fed.    

25bps from the BoE today?

There is some doubt as to what level the BoE will raise UK interest rates by, at the conclusion of their latest MPC meeting later today. Given the slower growth and economic outlook in the UK, the chances of ‘only’ a 25bps move seem pretty high, however, the BoE have been somewhat less dovish of late, as they wax lyrical about the surging inflation in the UK, and so a 50bps move cannot be ruled out. This is especially true, if the BoE follow the example of so many other major central banks over the past few weeks in raising by 50bps, as they attempt to front-load hikes, perhaps fearing an imminent economic slowdown.

Sterling finds a modicum of support

After suffering a fairly spectacular decline over the past 10 days or so, the pound found some decent support against the dollar, after briefly penetrating below the 1.2000 psychological support region, and marking a two-year low in the process. Those weaker U.S Retail Sales and the Fed played a part in helping the rally, as GBP/USD briefly tapped 1.2200.

What else is happening today?

IRL – CPI inflation

USA – Building Permits, Housing Starts, Continuing Jobless Claims, Philadelphia Fed manufacturing Survey

NZD – Business NZ PMI (May)