The initial losses in EUR/USD were also quickly erased

Market movers today

  • With the Fed meeting behind us, focus turns to the ECB meeting. We do not expect any changes in policy or forward guidance, but some hawkish comments could be envisaged. Instead, we expect the forward guidance to change in July. The ECB will also publish n ew growth and inflat ion projections, where we expect a lower growth forecast for 2018 and an increase in inflation project ions, especially for 2018. Furthermore, focus will also be on how President Draghi will address the recent weeks of political turmoil in Italy. For more details, see our ECB Preview – End of QE approaching but no formal announcement just yet, 8 June 2018.

  • In Sweden, we expect CPIF and CPIF ex energy to bot h overshoot Riksbank's forecast (0.2pp and 0.04pp, respectively). This would bolst er the Riksbank's current plans for a rate hike in Q4 this year to which we assign about a 20% probability. For more details, see page 2.

  • In the US and the UK, retail sales in May are due out .

  • The Bank of Japan meets today and is expected to announce its monetary policy early Friday morning European time. We expect both the policy balance rate and the 10Y yield target to be left unchanged, at 0.10% and 0.00%, respectively.

 

Selected market news

As expected, the Fed raised the target range by 25bp to 1.75%-2.00% last night . The median dot for this year was lifted from a total of three hikes to four, as one member became more upbeat , which was enough to move the median. More importantly, the Fed removed a lot of soft forward guidance in the statement, as Chairman Jerome Powell wants more flexibility now the Fed funds rate is close to neut ral. This is slight ly more hawkish than we had expected an d we now think it is more likely than not that the Fed is going to hike in both September and December (previously only in December) although it is st ill a close call between three and four hikes, which is also what the dot plot signals. For more details see FOMC review: Four hikes more likely after removal of soft wordings, 13 June.

US yields init ially gained across the government bond curve with the 10Y yield briefly rising above 3% on the FOMC announcement . However, increases quickly faded and the 2Y10Y US yield curve flat tened to 40bp – the flat test since 2007. The initial losses in EUR/USD were also quickly erased as Powell st ressed that an inflation overshoot will be allowed (USD negative)

US equity markets ended the day lower and the negat ive close in the US is mirrored in Asia this morning, where weaker-than-expected Chinese retail sales and indust rial production data also weigh on risk sent iment .

The Bank of Japan (BoJ) reduced its buying of bonds for the second t ime this month, by cut t ing purchases in the 3-5Y segment by JPY30bn to JPY300bn at its regular operat ion. The reduction in the 3-5Y segment follows t he BoJ's unexpected cut in buying in the 5-10Y segment by JPY20bn on 1 June, and should would encourage flat tening along the yield curve.

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