Fed completes dovish U-turn

Rates

Global core bonds gained ground yesterday with US Treasuries significantly outperforming German Bunds after a dovish Fed meeting. The US central bank completed the U-turn it started at the end of the year. The Fed shelved all rate hike bets for the remainder of the year and pursues an end to its balance sheet run-off by the end of September. Moreover, the new Fed projections pencil in only one more rate hike this cycle (2020). Some might see the Fed's message as a strong hint that the end of the economic/monetary cycle is near. Patience is global central bank's key word. Fed chair Powell seemed discouraged by the fact that the central bank didn't achieve its 2% mandate "in a more symmetrical way". One of the main drivers behind the Fed's rigid pace of rate hikes last year was an expected inflation overshoot which didn't materialize. Fed governors now want firm evidence of higher inflation before taking more action. Fed chair Powell opened the debate by stating that the US economy is in a "good place" and that he wants to keep it that way. Dark (international) clouds are piling up above the economy. Therefore, there's no rush to act in "one direction or the other". "It may be some time before the outlook for jobs and inflation calls clearly for a change in policy". Markets were positioned for a soft message from the US central bank, but didn't expect them to go that far. US yields lost 5.1 bps (30-yr) to 9.8 bps (5-yr) with the belly of the curve outperforming the wings. The US 10-yr yield fell to 2.53%, approaching key support around 2.49%. Short term rate markets continue to factor in an unchanged Fed policy rate this year, followed by a rate cut in 2020.

Asian stock markets are mixed overnight with China outperforming. WS couldn't maintain initial gains despite the Fed's soft message. The German Bund made a catch-up move with the US Note future, which remains underpinned. Today's eco calendar contains US Philly Fed Business Outlook and weekly jobless claims. The market reaction will probably be even more asymmetrical than ahead of the Fed meeting with weak data provoking US T Note gains while strong data might be ignored. In the first case, markets will more and more read into the Fed's message that they call it a cycle. The EU Summit, including the brexit extension debate, is a wildcard for trading.

Both the ECB and Fed created fertile breathing ground for additional bond gains over the medium term, flattening the curve. The US 10-yr yield is heading for a test of the lower band of the 2.5%-2.79% trading rage. The German 10-yr yield can return to zero and even negative levels unless growth/activity data start picking up at a rapid pace.

Download The Full Sunrise Market Commentary