Hawkish 75bp from the Fed, BoJ remains the dovish outlier

Market movers today

We expect the Swiss National Bank (SNB) to raise the policy rate by 75bp to curb underlying inflation pressures. This will bring the policy rate to 0.50%, thus leaving negative territory for the first time since 2014.

We expect Norges Bank to raise its policy rate by 50bp, but to deliver a rate path that is below market pricing (for more details see the Nordic section).

In our view, Bank of England will raise its policy rate by "only" 50bp, as they weigh in a looming recession against still high inflation pressures. However, we recognise that it is a close call between 50bp and 75bp as the market also thinks.

ECB's Isabell Schnabel speaks today, which will provide an important gauge about ECB plans for the October meeting, given that she is currently a very influential member of the ECB's monetary policy committee.

Regarding economic releases, we get consumer confidence in the euro area, which is expected to deteriorate further, while in the US, the Conference Board leading index for the US economy is likely show a small uptick due to lower gasoline prices. In addition, new unemployment claims will be scrutinized to see if the US labour market is starting to show signs of weakness.

The war in Ukraine is also becoming a market theme after Russian President Putin yesterday announced a partial mobilisation of Russian forces and threatened to use nuclear weapons.

The 60 second overview

Fed: The Federal Reserve hiked rates by 75bp at their meeting last night, in line with our expectations. While Fed Chairman Powell provided little news in terms of concrete policy signals, the updated economic projections were clearly more hawkish than markets had anticipated. The FOMC median 'dot' sees the Fed Funds rate rising to levels around 4.5% next year. Powell highlighted that Fed will continue hiking until it sees clear signs of growth moderating below potential and labour markets cooling. In contrast, we think the US economy is likely to perform relatively well in the near-term, and look for a rebound in the Q3 GDP figures. Consequently, we also think Fed will prefer to continue frontloading the upcoming rates hikes, and now expect Fed to hike by 75bp at both November and December meetings. Looking further into 2023, we continue to see risks tilted towards rates staying at restrictive levels for longer. Read our full take in Research US - Fed review: Hawkish 75bp - Fast hikes to continue, 21 September.

Bank of Japan: No changes from the Bank of Japan (BoJ) this morning, which kept its QQE with yield curve control in place. The dovish guidance also remains in place, as short- and long-term policy interest rates will remain at their present or lower levels. Thus, BoJ remains an outlier among major global central banks, keeping the pressure on Japanese yields and the yen intact. USD/JPY briefly traded above 145 on the decision and then returned lower.

Market sentiment: Risk sentiment weakened late in yesterday's session after a rollercoaster ride during the FOMC meeting. The initial hawkish reaction to the monetary policy statement eased during Powell's speech, but S&P500 ended the day 1.7% lower and US yield curve inverted further with the 2y UST yield reaching new highs above 4.10%. EUR/USD moved sharply lower near 0.98, and in line with our expectation of further rate hike frontloading, we also continue to look for further EUR/USD weakness.

War in Ukraine: Yesterday, Putin announced the first partial mobilisation of Russian army reserves since the World War 2. The move includes calling up 300.000 reservists and indefinite extensions to the professional troops' contracts. We continue to think that the mobilisation will be difficult to implement, because as illustrated by protests in Russia after yesterday's announcement, it is a highly unpopular move among the general public compared to what the Russian officials have called 'a special military operation' in the past. Putin also threatened with the use of tactical nuclear weapons, which was broadly condemned by the western leaders. EU foreign ministers agreed on providing more weapons for Ukraine and further sanctions against Russia, which could be announced around mid-October (see Reuters). In the markets, especially HUF and PLN were under pressure yesterday,

FI: The Federal Reserve raised rates by 75bp yesterday and more is to come as they expect another 125bp hike before year-end. This was more hawkish than expected and Fed Chairman Powell and the Federal Reserve also cut their growth forecast but they are not expecting a recession like the Bank of England.

FX: USD was generally stronger as US yields continued to climb ahead of the Fed even though risk sentiment rebounded. USD/SEK breached 11.03, a previous ATH from June 2001. EUR/USD fell immediately after the decision and fully erased losses during the press conference such that the net effect was fairly contained. USD/JPY dropped as the US yield curve bull flattened. The 0-1.5h response in EUR/Scandies was muted and within the range of four figures.

Credit: Credit markets continued the cautious sentiment ahead of the US rate decision, leaving iTraxx main slightly wider by 1.9bp at 122.4bp, while Xover widened 4.6bp, closing the session at 601.4bp.

Nordic macro

Norway:  We expect Norges Bank (NB) to raise its policy rate by 50bp today and signal that it will "most likely" go up again in November, without saying how much. The policy rate path in the accompanying monetary policy report will therefore be slightly higher for the next couple of quarters, because the bank has accelerated its hiking cycle. From summer 2023, however, we expect the path to be slightly lower than in the June report, largely because we expect NB to have to revise down the growth outlook for both the domestic and the global economy. We expect it to show a further 50bp increase in Q4 and some chance of a "normal" hike of 25bp in Q1. It will probably also indicate the possibility of a rate cut towards the end of next year. Admittedly, the risk is tilted to the upside as NB could be even more determined to fight inflation.