Fed officials talk up rate hikes

• Comments by several Fed presidents overnight supported the view that the FOMC will accelerate the pace of rate hikes at the May meeting, ahead of today’s March inflation reading. Chicago Fed president Evans said a 50bp hike should be considered and “perhaps…highly likely” if the Fed wants to get to a neutral policy rate by the end of this year. Christopher Waller indicated that higher rates may result in some “collateral damage” in terms of unemployment and growth.  
• UK industrial production declined -0.6% m/m in February, against forecasts for a 0.3% rise. On an annual basis, IP growth slowed to 1.6% y/y from an upwardly revised 3.0% in January. Manufacturing output fell -0.4% m/m while mining & quarrying declined -3.2% m/m. Separately, construction output also came in below expectations, down -0.1% m/m in February while y/y growth slowed to 6.1% y/y.
• Japan’s PPI came in higher than forecast at 9.5% y/y in March, with the February reading revised higher to 9.7% from 9.3% previously. This was due both to a weaker yen and higher commodity prices.  Firms are reluctant to fully pass on the price increases to consumers, and higher PPI is likely to squeeze margins in the near term.
• The UAE cabinet approved a strategy to double the size of the digital economy over the next decade. The digital economy accounts for 9.7% of UAE GDP currently according to the statement. A new Council for Digital Economy was created to help achieve this goal.

Today’s Economic Data and Events

10:00 UK ILO unemployment rate (Feb) forecast 3.8%

10:00 GE CPI (Mar final) forecast 7.3% y/y

13:00 GE ZEW survey (Apr) expectations forecast -48.5

16:30 US CPI (Mar) forecast 1.2% m/m and 8.4% y/y

16:30 US core CPI (Mar) forecast 0.5% m/m and 6.6% y/y

Fixed Income

• The US Treasuries curve continues to bear steepen with near-dated bonds edging higher on the day with yields down around 1bps on the 2yr to 2.4975%. The 10yr yield though continues to push higher relentlessly, adding 8bps overnight to close at 2.7801% and has moved up above 2.8% for the first time since 2018.
• Charles Evans, head of the Chicago Federal Reserve Bank, said overnight that a 50bps hike was “worthy of consideration” at the May meeting, shifting another long-time dove into policymakers who favour more aggressive tightening. At the same time, Fed governor Christopher Waller noted that some “collateral damage” may happen as a result of tightening policy.
• European bond markets were generally weaker overnight as the markets increasingly expect policy normalization from the ECB and are also pricing in the uncertainty around the outcome of the French presidential election. Yields on 10yr bunds rose 11bps to close at 0.811%, their highest level since 2015, while gilt yields rose 10bps to 1.844% and OATs added 5bps to 1.312%.
• Emerging market bonds fell with emerging European bonds leading the decline. Yields on Poland 10yr bonds rose almost 19bps to 6.214%. South African bonds dropped with yields up 5bps at 9.985% while Indian 10yr bonds dropped further after last Friday’s slump with yields up nearly 3bps to 7.146%.
• The Bank of Israel raised rates by 25bps to 0.35% overnight, a larger hike than was expected. Policy rates are now at their highest level since 2014.

FX

• The dollar eventually moved higher on the day as the Euro faded an initial pop higher in response to the outcome of the French presidential election. However, EURUSD still managed to record a day of modest gains, up less than 0.1% to 1.0884. USDJPY continues its march higher, closing above 125, a rise of 0.8% overnight as investors continue to price in major policy divergence between the Fed and Bank of Japan. Sterling held relatively stable with GBPUSD at 1.3030.
• Commodity currencies showed further weakness as raw materials markets flash anxiety over conditions in China. USDCAD added 0.46% to settle at 1.2630 while AUDUSD fell 0.55% to 0.7417 and NZDUSD closed down 0.34% at 0.6826.

Equities

• Ongoing commentary from Fed officials around more aggressive tightening weighed on equity markets on the first day of the week. In the US, the NASDAQ remained under significant pressure, dropping -2.2% on the day. The index has now lost -14.3% since the start of the year. The Dow Jones (-1.2%) and the S&P 500 (-1.7%) also closed lower, albeit to a lesser degree.
• The selling had been in play earlier in the day in Europe, where most key indices closed lower. The DAX dropped -0.6% and the FTSE 100 -0.7%. An outlier was France’s CAC which bucked the trend and closed up 0.1% as the first round of the presidential election became clear.
• Locally, the DFM was the biggest gainer, adding 1.3%. The ADX and the Tadawul both added 0.7%.

Commodities

• Oil prices dropped around 4% in both WTI and Brent futures to start the week as Covid fears for China outweigh supply disruptions from Russia’s war in Ukraine. Brent closed below USD 100/b for the first time since the middle of March. Both contracts are nudging higher in early trade today, however.
• An official in Iran’s foreign ministry said talks for the revival of the JCPOA were in the “emergency room” and will be contingent on the US lifting sanctions, particularly on organizations of the Iranian government. Diplomatic momentum for the deal appears to be waning after a fraught few weeks ahead of Russia’s invasion of Ukraine.
• OPEC’s secretary general has noted that the EU’s avoidance of Russian oil was a “non-fundamental factor…totally out of our control” after a call from an EU energy official for the producers’ bloc to increase production. OPEC has maintained its focus on supply and demand fundamentals, rather than including political variables when it measures oil market balances. The latest OPEC monthly oil market report will be released today.

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