The Fed and the ECB monetary policy meetings drove financial markets today

  • As we expected, the FOMC increased the target range for the federal funds to 2.0% and the median projections of the FOMC for year-end 2018 increased to two rate increases from one previously. The FOMC expects economic conditions to remain solid and inflation to be near 2% over the medium term. The GDP projections increased to 2.8% (+0.1 pp) in 2018. Inflation expectations were revised up for both 2018 and 2019, while projections for the unemployment rate ticked down for both years. We maintain our baseline scenario of two additional rate increases in 2018, while the risk of three rate increases in 2019 continues tilting to the upside. After the FOMC meeting, the market implied probability of two additional interest rate hikes increased to 50%.
  • At today’s meeting, the ECB unveiled more details of its monetary normalization process. As regards non-standard measures, the central bank decided: i) to extend the asset purchase programme (APP) until December 2018 but at a monthly pace of €15 billion and, ii) to maintain the reinvestment of the principal payments of the securities purchased under the APP as they mature for an extended period after the end of the net asset purchases, for as long as necessary. Regarding standard measures, key interest rates were left unchanged, as expected, while the ECB strengthened its forward guidance on rates and announced “the key ECB interest rates to remain at their present levels at least through the summer of 2019 and in any case for as long as necessary (…),”.
  • The updated EZ GDP growth forecasts are weaker in 2018 due to the first quarter slowdown but remain unchanged in 2019-20. Changes in oil prices and the exchange rate led the ECB to revise its headline inflation forecasts for both 2018 and 2019 considerably upwards, while core inflation has also been revised slightly upwards.
  • The Fed and the ECB monetary policy meetings drove financial markets today.While the slightly hawkish FOMC had a fairly muted impact, if any, on financial markets, with the 10Y US yield remaining below the 3% threshold, the dovish tapering announced by the ECB weighed strongly on the euro, which depreciated sharply against the USD, breaking through the 1.17 level.
  • Eurozone 10Y yields declined sharply across the board (the 10Y German yield -4 bps), with peripheral risk premia remaining almost unchanged, with little differentiation between Spain and Italy. European equity indices showed a positive performance, particularly those that benefited more from the EUR depreciation, such as the DAX.
  • In spite of the Fed’s hike having been almost fully priced before the meeting, EM currencies depreciated across the board against the USD, also hampered by decreasing oil prices. Nonetheless the extent of the drop fluctuated among countries: the Turkish lira and the Argentinian peso underperformed, while other currencies depreciated slightly against the dollar.

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