No stopping the Fed from getting to neutral rates
|Global core bonds traded with a marginal upward bias going into the FOMC meeting. The Fed as expected hiked its policy rate from 1.5%-1.75% to 1.75%2%. Both the accompanying statement and the new dot plot changed in a hawkish way. The new dot plot shows 1 additional rate hike in 2018 (4 in total this year) and 2019 (3 from 2). The Fed dropped its accommodative forward guidance and Powell suggested that the central bank is 4 rate hikes away from hitting a neutral level. We expect quarterly steps between now and June next year. The eco outlook remains bright, but Powell stressed the symmetric inflation target indicating no intention to step up the rate hike pace. for a full review of the Fed-meeting.
US Treasuries lost ground after the release of the statement and dots with the US yield curve bear flattening. However, we must say that the market reaction was rather muted. US yield changes varied between +2.9 bps (2-yr) and -0.8 bps (30-yr). The US 10-yr yield tested the psychological 3% mark, but a break didn’t occur. Changes on the German yield curve varied between +0.2 bps (2-yr) and -0.9 bps (10-yr). 10-yr yield spread changes vs Germany narrowed 3 to 5 bps with Greece (+5 bps) underperforming.
Asian stock markets lose ground overnight in line with yesterday’s WS losses. The US Note future trades positive, already returning to post-FOMC levels. We expect a neutral opening for the Bund.
Today’s eco calendar contains US retail sales, import/export prices and weekly jobless claims. Data are expected to confirm US Q2 GDP strength and building inflation pressure. That should be negative for US Treasuries with yesterday’s message from the Fed in mind, though the lackluster market reaction suggests otherwise. The main focus goes to the ECB meeting. We expect the central bank to take the next step in its normalization process by mapping the end of its asset purchase programme. Draghi may announce that the ECB will taper its asset purchases by €10bn/month to conclude APP by December 2018. The forward guidance on interest rates and QE reinvestments are both likely to remain unchanged. for a full preview of the ECB-meeting. Final guidance on APP would be a significant development and should soon put a firm bottom below European interest rates. We have a downward bias for the Bund today with a likely underperformance vs the US Note future. The German 10-yr yield should regain the 0.5% mark, opening the way for a return to this year’s highs.
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