Fed rate hike expectations pushed to September post FOMC

Market movers today

The two-day EU-leader summit in Brussels will conclude today before noon. Greece is not formally on the agenda but Greek Prime Minister Alexis Tsipras is expected to hold separate meetings with ECB president Mario Draghi, German Chancellor Angela Merkel and the European Commission and Council in connection with the summit. According to press reports the ECB on Wednesday discussed possibly banning further purchases of Greek T-bills by Greek banks. The EU sanctions on Russia are also up for review but the EU-leaders will most likely keep economic sanctions on Russia in place until the Ukraine ceasefire deal is fully working.

After the financial markets’ dovish interpretation of the FOMC statement and projections on Wednesday it will be interesting to hear to what degree the individual FOMC-members have changed their views. Today there are two interesting speeches from FOMC-members in the calendar. The speech by Atlanta Fed president Dennis Lockhart (voter, dove) is the most interesting as he could be a swing-voter. Lockhart has recently argued that an interest rate hike would be on the table from June onward but he needed more data to support a decision. The speech by Chicago Fed president Charles Evans (voter, dove) will without doubt be very dovish. Evans recently argued that a rate hike should be delayed until 2016.

Selected market news

Following the FOMC meeting on Wednesday, we have pushed our expectations for the first rate hike from June to September this year. The combination of recent weakness in US data, FOMC members in general expressing a preference for tightening too late rather than too early and not least the negative impact on growth and inflation from the unexpectedly fast appreciation in the trade-weighted USD, has in our view raised the bar for a June hike. Importantly, we still look for higher interest rates in the US - especially in the 2-5 segment as the market prices in an extremely slow hiking cycle - and we still expect EUR/USD to drop below parity in six months as the Fed-ECB divergence continues to weigh on the cross.

There were no major surprises in the minutes from the 17-18 February monetary policy meeting in Bank of Japan. Overall, the minutes indicate that the majority of the board members remains relatively optimistic in terms of the economic outlook and still expect inflation to increase to around 2% by the end of fiscal year 2016 (in line with its target). In terms of monetary policy, the board remains split as not all members support the size of the QE programme currently at an annual pace of JPY80trn. We expect that the Bank of Japan will stay on hold for the rest of the year.