FOMC minutes pave way for more 50bps hikes

• The FOMC released the minutes from its 3-4 May meeting yesterday, and while the officials had discussed the option of a more ‘restrictive’ policy to fight inflation – whether through hiking more aggressively or hiking for longer – the majority of officials in the end agreed on hiking by 50bps at the next couple of meetings, in line with market expectations. Participants noted the risks to the outlook emanating from the war in Ukraine and the lockdowns in China and the importance thus assigned to ‘risk-management considerations.’ Nevertheless, consensus was for expeditious action at present, which could potentially lead to a pause or a slowdown later in the cycle if deemed appropriate, leaving ‘the Committee well positioned later this year to assess the effects of policy firming and the extent to which economic developments warranted policy adjustments.’
• Durable goods orders in the US grew 0.4% m/m in April, missing projections of 0.6%. March’s reading meanwhile was revised down from 1.1% to 0.6%. The ex-transportation reading was similarly downbeat as that expanded by 0.3%. The slowdown is likely being driven by both inflationary pressures and mounting interest costs for capital goods, although this could be offset through the year as supply chain issues ease, especially those around vehicles.
• Consumer confidence came in at 86 in France yesterday, marking the lowest level for the index since 2014. This was down from a downwardly revised 87 the previous month and missed projections of 89. Consumer confidence in the Eurozone has been pummeled by high inflation, although France’s has been lower than its peers (5.4% in April) as energy costs have been kept lower.

Today’s Economic Data and Events

15:00 Turkey one-week repo rate. Forecast: 14.0%

16:30 US initial jobless claims, week to May 21. Forecast: 215

Fixed Income

• Minutes from the May FOMC meeting seemed to confirm much of the market’s stance on where US monetary policy is headed; two more 50bps hikes then 25bps hikes afterward if needed. Market reaction was relatively contained as the minutes didn’t highlight anything that hadn’t already seemingly been shared to the market via Fed speakers. Yields on the 2yr UST added a bit more than 1bp to 2.4919% while the 10yr yield closed essentially flat at 2.7452%.
• Other bond markets closed higher as ECB officials openly debate whether to use a 50bps hike in July to take deposit rates up to 0% or whether to take a more gradual pace of hikes. Yields on the 10yr bund slipped by about 2bps to 0.947%. Gilts were the standout loser, however, with yields up 2bps on the 10yr to 1.907%.
• Emerging market bonds showed mixed performance. South African yields closed higher by 5bps at 10.174% while Turkish bonds rallied with yields lower by 30bps to 23.03%.

FX

• Even as minutes from the May FOMC didn’t give any indication that the Fed would be relentlessly hawkish in its decisions this year, markets still turned toward the dollar overnight. EURUSD fell by 0.5% to 1.0681 as how far the ECB will go in terms of normalizing policy becomes an open debate among policymakers. Doves took to the air yesterday with Fabio Panetta and Olli Rehn both pushing back against aggressive hikes. USDJPY rose by almost 0.4% to 127.32 while GBPUSD added 0.3% to close at 1.2574.
• Commodity currencies were mixed. NZDUSD closed up by 0.12%, weaker than may have been expected given the 50bps hike and hawkish outlook from the RBNZ earlier in the day. USDCAD closed slightly lower while AUDUSD fell by 0.2% to 0.7091.

Equities

• Equity markets had some respite yesterday after the Fed’s minutes were somewhat less hawkish than had been possible. In the US, the Dow Jones, the S&P 500 and the NASDAQ added 0.6%, 1.0% and 1.5% respectively.
• European markets had been similarly buoyant earlier in the day. The FTSE 100 (0.5%), the DAX (0.6%) and the CAC (0.7%) all closed higher.
• Locally, the DFM closed flat but the ADX added 0.9% and the Tadawul ended the day 1.3% higher.

Commodities

• Oil prices rose overnight with Brent futures adding 0.4% to USD 114.03/b and WTI up 0.5% at USD 110.33/b. Data from the EIA showed a 1m bbl draw in US commercial crude inventories and nearly a 6m bbl drop in SPR stocks. Gasoline inventories were down more modestly while distillate inventories were higher. Oil production in the US was unchanged at 11.9m b/d.
• A senior US official cautioned that efforts to restore the JCPOA, the Iran nuclear deal, were weakening and there appears to be limited support in the US Congress to ease any sanctions in order to get a new deal agreed.
• Amin Nasser, the CEO of Saudi Aramco, said that oil markets looked balanced but that a shortage of spare capacity was contributing to price volatility.

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