The Fed funds futures market indicates

Market Movers

• In the euro area the ZEW, IFO and PMI business surveys for March will attract attention after all three figures declined in January and February, with the financial uncertainty having a negative spill-over effect on economic sentiment. We expect the improved financial risk sentiment to result in a stabilisation but not a strong rebound in the three figures. The biggest increase should be seen in the financial ZEW expectations, whereas the economic survey indicators (PMI manufacturing and IFO expectations) are still faced with headwinds from weakness in global manufacturing, the stronger effective EUR and Brexit risks. On the other hand, the low oil price supports private consumption and hence the domestic-driven PMI services.

• In the US will see the release of the Markit PMI. After better regional indicators the US PMI is expected to rebound from 51.3 in February to 51.9 in March. The Richmond Fed Manufacturing index is also expected to rebound. We keep an eye on Fed’s Evans when he speaks tonight after the somewhat hawkish comments from Lockhart and Williams yesterday. He is known to be dovish and he is a non-voting member of the FOMC.

Selected Market News

In the US Treasury market comments from Fed’s Williams and Lockhart pushed up yields. Both said that the FOMC may raise rates as soon as its 26-27 April meeting. That is way earlier than priced in the market and also much earlier than the Fed’s ‘dots’ predict and suddenly a June hike seems like a fair comprise for the FOMC.

The Fed funds futures market indicates a 10% chance that the Fed will raise rates by April and an around 40% probability of an increase by June. We look for a September hike. See in that respect our Yield Forecast Update that we published yesterday. We doubt that the comments from Williams and Lockhart are shared by the FOMC majority including Yellen.

The somewhat hawkish Fed comments come as inflation expectations over the past month have moved higher in the US. 10Y break-even rates have gone up by more than 45bp since mid February and at 1.66% are at the highest level since August 2016 – but still low in a historical context. Note also that Fed’s Lacker said that he is ‘reasonably confident that, barring subsequent shocks, inflation will move back to the FOMC’s 2 percent objective over the medium term’. He added ‘Inflation has been held down recently by two factors, the falling price of oil and the rising value of the dollar. But neither factor is likely to depress inflation indefinitely. After the price of oil bottoms out, I would expect to see headline inflation move significantly higher’.

There was little action in the US stock market yesterday and the hawkish Fed comments did not spoil the sentiment. M&A activity also supported sentiment. The positive sentiment has been carried over to Asia, where especially Nikkei is performing supported by a weaker JPY.

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