Federal Reserve holds course

• The Federal Reserve held course, keeping interest rates on hold and its monthly bond-buying program steady, giving no sign it was ready to reduce its support for the recovery while nodding to the strength US economy's recovery.  Of note, was the Fed’s language about the coronavirus, which reflected a slightly less negative view than the Fed's description in March. That, coupled with the strong language on the economy, indicates the Fed carefully tiptoeing into discussion about when to wean the US economy from its crisis-era programmes. The Fed left unchanged the list of conditions, first set in December 2020, that must be met before it considers pulling back from the emergency support put in place to stem the impact of the pandemic. That includes "substantial further progress" towards its inflation and employment goals before reducing its monthly bond purchases. Fed Chair Jerome Powell said “It is not time yet," to begin discussing any change in policy repeating his assessment that the economy was still a long way from a return to full employment.

• The US trade deficit in goods surged 4.0% m/m to USD 90.6bn last month, the highest in the history of the series, suggesting trade was a drag on economic growth in Q1, however this was likely offset by robust domestic demand and substantial government aid. The data which was released by the Commerce Department also showed inventories at retailers were drawn down in March, highlighting the strong domestic demand in the economy. Exports of goods was up 8.7% m/m to USD 142.0bn on the back of shipments of motor vehicles, industrial supplies, consumer and capital goods, and food. Offsetting that was imports which advanced 6.8% m/m to USD 232.6bn. Imports rose broadly across most categories ranging from motor vehicles, to industrial supplies, consumer goods and food. Capital goods imports also rose solidly. Wholesale inventories were up 1.4% m/m last month after rising 0.9% m/m in February, stocks at retailers tumbled 1.4% m/m after gaining 0.1% m/m in February. Retail inventories excluding autos, rose 0.6% m/m after advancing 1.4% m/m in February.

• European Central Bank President Christine Lagarde said yesterday that the Eurozone economy is set for rapid growth in the second half of the year as the deployment of coronavirus vaccines improves and life in the eurozone begins to normalize. While less than a quarter of the bloc's population has received their first shot so far, the central banker expects vaccine bottlenecks to ease in the coming months, with the challenge being whether governments can overcome the logistical challenge of distributing the shots as fast as they come in, expecting 70% of the population to have their first jab by the end of June. She further added that there is no reason to give up the ECB's projections for 4% growth as vaccines provide light at the end of the tunnel. She also pointed that the ECB's tools could be recalibrated as the bank transitions from crisis fighting to supporting the post-pandemic economy.

• The Central Bank of Egypt (CBE) kept its benchmark interest rates on hold yesterday, with the overnight deposit rate at 8.25% and the overnight lending rate at 9.25%. This was the fourth consecutive meeting at which the central bank has held rates steady, despite persistently low inflation which has left its real rates among the highest in the world. We expected that the bank would remain on pause once more this time around, but once the potential inflationary pressures of Ramadan have faded, we see scope for one more rate cut to the tune of 50bps at the June 17 or August 5 meetings. The still resolutely dovish messaging from the US Federal Reserve, and resultant dip in USTs, should allow the CBE to cut rates once more without necessarily jeopardising international portfolio inflows.

Today’s Economic Data and Events   

11:55     EU German Unemployment Change (Apr) Forecast -10K

16:30     US GDP (QoQ) (Q1)   Forecast 6.50%

16:30     US Initial Jobless Claims Forecast 560K

18:00     US Pending Home Sales (MoM) (Mar) Forecast 6.00%     

Source: Bloomberg

Fixed income

• The Federal Reserve kept policy rates steady at 0.25% on the upper bound and maintained its monthly asset purchases of USD 120bn/month at its April FOMC. The Fed did note that “economic activity and employment had strengthened”, helped along by the USD 1,400 stimulus checks that Americans received earlier this year and continued to describe the rise in inflation as transitory.
• Where market attention was most focused was on whether the Fed would outline any plans to tapering its accommodative policy. Fed chair Jerome Powell said it would “take some time” before the Fed was on its way to tapering policy which would likely come in the form of raising economic projections first, then pulling back on asset purchases and finally higher interest rates.
• Markets seemingly took the Fed’s messaging as dovish even though it simply backed up most public statements from policymakers over the last few weeks. In that sense the rise in US treasuries in response to the FOMC is a little surprising—10yr yields moved from an intraday high of 1.66% to just below 1.61% at the end of trading.
• OQ, Oman’s state owned energy holding company, priced a USD 750m 7yr bond at 5.125%, tighter than initial guidance. OQ is rated at ‘BB-‘ by Fitch. Elsewhere Abu Dhabi Ports priced a USD 1bn 10yr bond at midswaps +110bps with considerable investor interest.
• Egypt’s central bank held policy rates unchanged, keeping deposit rates at 8.25% and lending rates at 9.25%.

FX

• The dollar sold off last night in line with the markets’ interpretation of Fed commentary as dovish. The DXY index sank 0.3% to 90.609% and is off in early trade this morning. FX action was essentially concentrated around the Fed announcement last night with most pairs showing limited movement early in the day.
• EURUSD added 0.29% to settled above 1.21 for the first time since February while USDJPY has pushed back to the mid 108 range. GBPUSD managed to rise for a fourth day in a row and is extending those gains in early trading today, up 0.2% this morning at 1.3969.
• Commodity currencies were no exception to the dollar selling with CAD, AUD and NZD all up strongly. In emerging markets, ZAR was the notable outperformer with the rand moving from around 14.45 mid day to close below 14.25. Both INR and TRY were relatively steady over the course of trading.

Equities

• Global equity markets were a little mixed yesterday, with the major US benchmark indices declining, while most major indices elsewhere saw modest gains. There was a -0.1% decline seen in the S&P 500, while the NASDAQ and the Dow Jones lost -0.3% and -0.5% respectively. However, with positive noises from the Fed, and some strong earnings releases post-market as well (especially in the tech sector) the likelihood is that there will be a recovery of those losses, and S&P 500 futures have been trading up 0.4% earlier this morning.
• Elsewhere was more positive yesterday. In Asia, the Nikkei and the Shanghai Composite gained 0.2% and 0.4% respectively, while in Europe the CAC gained 0.5% and the DAX and the FTSE 100 both closed 0.3% higher. Here too earnings season helped bolster markets, with European banks in particular performing well.
• Within the region, the DFM closed down -0.4% while the Tadawul gained 2.6%.

Commodities

• Oil prices responded with vigour to the OPEC+ plan to keep adding barrels over the next three months, shaking off concerns that demand is at risk from rising numbers of Covid-19 cases in India and other major economies. Brent futures settled at USD 67.27/b, up 1.3% overnight while WTI and Murban both added around 1.5% to close at USD 63.86/b and USD 64.97/b respectively.
• EIA data showed a modest draw in US crude stocks last week of 1.36m bbl along with a negligible build in gasoline and a healthier draw in distillate stocks. Production fell back by 100k b/d to 10.9m b/d while product supplied moved back up above 20m b/d with week/week gain of 1.6m b/d.

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