25 May 2023
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FOMC minutes suggest another hike could still be in play

By Edward Bell

Minutes from the May FOMC suggested that the upcoming June meeting is still in play as far as another hike in the Fed Funds rate is concerned as some members felt that since the process of getting inflation to target was “unacceptably slow, additional policy firming would likely be warranted.” That was contrasted by some FOMC members who thought that if the economy performs close to the Fed’s economic projections, then no more hikes would be necessary. There is clearly a live discussion happening among FOMC members and regional Fed presidents in evaluating whether inflation is moving lower on its own now or if it will need further restrictive policy to get price growth to cool off.

Fitch moved the outlook on the US sovereign rating to “credit watch negative,” often a precursor to a downgrade. The rating agency specifically cited the fraught negotiations around the debt ceiling. Fitch said that if the US paid out on interest instead of other liabilities (wages, social security) that would not constitute a default. Both Moody’s and S&P have kept the outlook for the US rating stable.

Inflation in the UK decelerated in April to 8.7% y/y from more than 10% in March. However, the CPI print still came in faster than markets had been expecting and the slowdown from the previous month was mainly down to higher energy costs from Q2 2022 falling out of the base. Core inflation was a more worrying signal, rising to 6.8% y/y in April from 6.2% previously. That represents the strongest level of core price pressure since 1992 with both core goods and services inflation rising. We had been expecting at least another 25bps hike from the Bank of England with markets now pricing in the possibility of slightly more than a 25bps move.

Germany’s IFO survey of businesses weakened in May thanks to deteriorating expectations. The forward looking component of the index dropped to 88.6 from 91.7 in April, underperforming market expectations. The assessment of current conditions dropped to 94.8 from 91.7 a month earlier. The deterioration in business expectations was across all sectors but particularly weak in trade and manufacturing with services holding up relatively better.

Qatar’s finance minister said the country was “committed” to USD 5bn of investment for Egypt but said the flows would be “purely commercial…when it comes to grants and cash and just checks, it’s becoming very difficult.”

Today’s Economic Data and Events

  • 11:20 ID Bank Indonesia reverse repo: forecast 5.75%
  • 15:00 TU One-week repo rate: forecast 8.5%
  • 16:30 US Initial jobless claims May 13: 245k
  • 16:30 GDP q/q Q1 (second): forecast 1.1%

Fixed Income

  • The minutes of the May FOMC didn’t give the Treasury market anything it didn’t already know and more attention remains on the impasse around the debt ceiling in the US. Yields on 2yr USTs ended the day cheaper, however, up by about 6bps to 4.3757%. the 10yr yield rose by 5bps to 3.7419%.
  • European bonds ended the day marginally lower. Bund yields were near enough unchanged at 2.467% while gilt yields showed more movement, up by 5bps at 4.205%.


  • The unease over lack of progress on the debt ceiling is fueling risk off moves in currency markets with the dollar higher against peers overnight. EURUSD fell 0.2% to 1.075 while GBPUSD dropped by 0.4% to 1.2365. USDJPY rallied 0.6% to close the day at 139.47.
  • In commodity currencies, NZDUSD was the standout underperformer after the RBNZ hiked 25bps yesterday and gave strong indications it was ending its tightening cycle. The kiwi fell 2% to 0.6112. AUDUSD dropped in sympathy with its Tasman neighbour, down 1% to 0.6544 while USDCAD added about 0.7% to 1.3595.


  • Risk-off sentiment was strongly to the fore in global equity markets yesterday, with sharp losses across the globe. In Europe, the CAC, the FTSE 100, and the DAX dropped 1.7%, 1.8%, and 1.9% respectively.
  • Losses in the US were not quite so severe but nevertheless all three benchmark indices fared poorly amid debt ceiling pressures, with the NASDAQ losing 0.6%, the S&P 500 0.7%, and the Dow Jones 0.8%.
  • Locally, the DFM lost 0.1% and the ADX 0.3%.


  • Oil prices managed a third day in a row of gains overnight with both Brent and WTI futures up almost 2% at USD 78.36/b and USD 74.34/b respectively. The moves come almost in spite of the comments from Saudi Arabia’s energy minister earlier this week telling speculators to “watch out.”
  • More significantly, US crude inventories plunged by 12.5m bbl last week according to weekly data from the EIA. Both gasoline and distillate stocks were also lower while production ticked marginally higher by 100k b/d.

Written By

Edward Bell Head of Market Economics

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