Fed hikes by 75bps

• The Federal Reserve hiked rates by 75bp to 2.5% yesterday, in line with our expectations, bringing the upper bound of the Fed Funds rate to what the Fed considers a “neutral” level for policy rates. The FOMC judged that further increases will be appropriate but chair Jerome Powell said the size of any future moves would be determined by the data. He did not take another outsize 75bp hike off the table, but with inflation set to slow in the coming months, we think 50bp hikes will be more likely in the coming meetings. While Powell indicated that he does not believe the US economy is currently in recession, highlighting strong labour market data and “much too high” inflation.  However, he noted that below trend growth and some softening in labour market conditions will be necessary in order to bring inflation down. 
• Central banks in Saudi Arabia, the UAE, Bahrain and Qatar followed the Fed in raising rates by 75bp, but the Central Bank of Kuwait raised its benchmark rate by just 25bp as its currency is pegged to a basket of currencies, not just the US dollar.
• US Durable goods orders rose by 1.9% in June, much faster than the -0.4% median forecast. This was largely due to strong defense aircraft orders, but core orders were also strong at 0.5% against 0.2% forecast. This suggests that business investment has remained robust in Q2.
• US pending home sales fell by more than forecast, declining -8.6% m/m against a forecast of -1.0%. On an annual basis, pending home sales were down almost -20% as higher mortgage rates weigh on demand.

Today’s Economic Data and Events

• 16:00 GE CPI (Jul) forecast 0.6% m/m and 7.4% y/y
• 16:30 US GDP growth (Q2) forecast 0.5% annualised
• 16:30 US Core PCE (Q2 q/q) forecast 4.4%

Fixed Income

• The 75bps hike to the Federal Funds rate from the Federal Reserve at their latest FOMC meeting came in largely as the market, and ourselves, had expected. At 2.5% on the upper bound rates are now as high as they reached during the last phase of Fed hiking from 2015-18 although this Fed has hit that level in four months. As markets were largely anticipating the move and Fed chair Jerome Powell outlined a path for 50bps hikes at subsequent meetings, market reaction was relatively assured with yields on the 2yr UST actually dipping by 5bps to 2.9979% and the 10yr yield down 2bps at 2.7849%.
• Market pricing remains for around 100bps more of hikes from here until the end of the year, split roughly between two 50bps hike at the September and November FOMC meetings.
• European bond markets closed lower overnight as the Eurozone’s economic picture is seeming to darken on a daily basis. Interruptions to natural gas flows from Russia will mean a serious threat to the regional economy at a time when inflation is still likely to be me with rate hikes from the European Central Bank. Yields on the 10yr bund rose by 2bps to 0.939% while 10yr Italian yields added more than 7bps to 3.308%. In the UK the 10yr gilt yield gained 4bps to 1.952%.
• Local currency emerging market bonds closed mixed overnight with South African 10yr yields down 2bps at 11.060% while the 10yr Turkish yield rose by 7bps to 16.69%.  

FX

• With the Fed delivering on market expectations of a 75bps hike, currency markets seemed to show some relief that there was no dissent for an even larger move or that Chair Powell seemed to line up 50bps hikes at subsequent meetings. EURUSD jumped by 0.8% overnight to the 1.02 level while GBPUSD added more than 1% to 1.2158. USDJPY fell by 0.25% to 136.57.
• In commodity currencies, AUDUSD led the way higher, rising by almost 0.8% to 0.6992 while USDCAD fell by about 0.5% to 1.2825. NZDUSD added 0.5% to 0.6263.

Equities

• With the Fed hiking in line with expectations rather than going in bigger with a 100bps hike, equity markets took some solace and US indices had a strong session. The NASDAQ, which has been the most sensitive to any moves or potential moves by the Fed, rose 4.1%, but the Dow Jones (1.4%) and the S&P 500 (2.6%) also had a good day.
• In Europe, the DAX added 0.5%, the FTSE 100 0.6% and the CAC 0.8%.

Commodities

• Oil prices settled higher in both the Brent and WTI markets, up by 2% each to USD 106.62/b in Brent and USD 97.26/b in WTI. The relatively lack of shock from the Fed seems to have helped lift risk assets more generally, including oil.
• The EIA reported a sizeable draw in inventories last week, down by 4.5m bbl in commercial stocks and another 5.6m bbl in strategic reserves. Gasoline stockpiles also moved lower, by 3.3m bbl, while distillates were roughly flat. US oil production did move higher, up by 200k b/d to 12.1m b/d.

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