Fed hikes by 25bps

The Federal Reserve hiked rates by 25bps at their first FOMC meeting of the year, taking the upper bound of the Fed Funds rate to 4.75%, its highest level since 2007. In its statement accompanying the hike, the Fed said that “ongoing increases” would allow monetary policy to become “sufficiently restrictive” to get inflation back to target. The FOMC also noted that it will assess the impact of cumulative tightening taken so far to decide the “extent of future increases.” In his comments after the decision, Fed chair Jerome Powell said that “a couple more rate hikes” would get policy to a level that is restrictive and that he didn’t “see us cutting rates this year” should the economy carry on according to the Fed’s projections. Overall, the FOMC decision was not as hawkish as could have been feared with the Fed now looking to shift down to 25bps more assuredly. 

The OPEC+ joint ministerial monitoring committee advised to keep production plans unchanged at its meeting overnight as the producers’ alliance assess the impact of China’s economy reopening more fully and the effect of more sanctions imposed on Russia’s refined product exports, which take effect next week. The next full ministerial meeting for OPEC+ will be held in June while the JMMC meetings will take place every two months. We had expected that OPEC+ would choose to stay on the sidelines of the market at present given some substantial uncertainties affecting near-term oil market conditions.

Headline inflation in the Eurozone slowed to 8.5% y/y in January, down from 9.2% a month earlier and coming in under market expectations. Energy price inflation slowed to 17.2% from 25.5% in December as natural gas prices have fallen thanks to improving supply conditions in the Eurozone. Core CPI, which strips out food and energy costs, remained at 5.2%, unchanged m/m and holding at record high levels. While the drop in headline CPI will be welcome, ECB officials have stressed that they still view underlying inflation pressures as too high and that more monetary tightening is needed. The ECB meets later today with a 50bps hike expected.

The ADP employment report of private sector firms showed hiring of 106k in January, lower than market expectations. The soft jobs growth was seemingly affected by the harsh winter weather conditions earlier in the year, particularly as the ADP survey was taken during the peak of the storm conditions. Elsewhere in the labour market, the JOLTS report showed that total job openings in the US rose to more than 11m in December, up from 10.4m a month earlier. The quits rate held steady at 2.7%.

The ISM manufacturing index fell to 47.4 in January, down from 48.4 a month earlier, and hit its lowest level since May 2020. New orders tumbled to 42.5 while backlogs improved somewhat. Overall production was still contracting in January at 48 on its subindex while prices paid continue to decline m/m.

Lebanon has officially devalued its exchange rate from the decades-long level of LBP 1,507/USD to the new official rate of LBP 15,000/USD. However, while the move acknowledges that the previous official rate has not been reflective of reality for some years now, the parallel rate has been far weaker than the new level, with the pound reportedly going as low as LBP 60,000/USD as Lebanon continues to struggle with multiple economic and financial crisies.

Today’s Economic Data and Events

• 16:00 UK Bank of England bank rate: forecast 4%
• 17:15 EC ECB deposit facility rate: forecast 2.5%
• 17:30 US Initial jobless claims Jan 21: forecast 195k
• 19:00 US factory orders Dec: forecast 2.3%
• Egypt overnight deposit rate decision

Fixed Income

• US Treasuries rallied as the Fed confirmed expectations and shifted to a slower pace of hikes at its FOMC meeting, hiking rates by 25bps. Yields on the 2yr UST fell 9bps on the close to 4.1063% while the 10yr also fell around 9bps to 3.4166%. The outlook for USTs seems set to improve as the Fed locks in a slower pace of tightening and as macro conditions in the US evolve, at this stage, to resemble a soft landing. Markets are pricing in an additional 25bps hike at the March 2023 FOMC meeting.
• European bonds closed quietly watching the Fed action and looking ahead to the ECB decision later today where a 50bps hike is expected. Yields on 10yr bunds closed at 2.282% and French 10yrs at 2.747%, both virtually unchanged. Gilts managed a modest rally, down 3bps to 3.301% ahead of today’s Bank of England decision.
• Central banks in the UAE, Saudi Arabia and Bahrain raised their policy rates by 25bps, tracking the Fed.

FX

• The dollar sank against peers overnight in response to a less hawkish than feared FOMC decision and press conference. The broad dollar index fell 0.9% with EURUSD providing much of the gains. The single currency spiked on the FOMC decision, rising by 1.2% to 1.099 and has pushed back above the 1.10 level in early trade today. USDJPY also moved in favour of the yen, falling by 0.9% at 128.98 while GBPUSD showed more muted gains, up by 0.5% at 1.2376.
• Commodity currencies also rallied against the dollar though USDCAD showed the least amount of action. The pair edged lower by 0.1% to 1.3291 while AUDUSD jumped 1.2% to 0.7137 and NZDUSD added 1% to 0.6506.

Equities

• US equity markets took the Fed’s 25bps hike as a more dovish one than might have been feared, and while the Dow Jones closed flat, the S&P 500 added 1.1% and the interest rate sensitive NASDAQ 2.0%.
• There was a mixed performance earlier in the day in Europe as the DAX added 0.4% but the CAC and FTSE 100 both ended the day 0.1% lower.
• Locally, the ADX added 0.3% and the DFM gained 1.4%.

Commodities

• Oil prices failed to heed the outcome of the OPEC+ JMMC and both contracts dropped overnight. Brent futures fell almost 2% to USD 82.84/b while WTI fell by 3% to USD 76.41/b. Even as OPEC+ advised to keep output steady, there may be some profit taking underway in oil at the moment as selling pressure has increased in the last few days.
• Inventory data from the US showed a 4.4m bbl build in commercial crude stocks last week along with builds in gasoline and distillate stockpiles. Production was unchanged at 12.2m b/d.