FOMC resumes rate hikes

The FOMC hiked the Fed Funds rate by 25bps yesterday, taking the upper bound to a 22-year high of 5.50%. The unanimous move, the 11th since this round of tightening began, had been widely anticipated by ourselves and by the markets and other observers, with the hold at the previous meeting having always been regarded as a pause rather than an end to the hiking cycle. In a statement that was almost unchanged from that issued after the June meeting, the FOMC cited ongoing risks from elevated inflation, and stressed that it would continue to monitor ‘incoming information for the economic outlook’. The only material change to the statement was an upgrade for the economy to now expand at a ‘moderate’ pace, from ‘modest’ previously. Fed Chair Jerome Powell left the door open for another move higher at the subsequent press conference, warning that while the fact that disinflation had been achieved without crashing the labour market was a ‘good thing’, ‘stronger growth could lead over time to higher inflation.’ Nevertheless, with labour market data starting to soften, and the disinflationary trend starting to appear secure, we think the most likely outcome is that rates are now held at this level before cutting begins in 2024.

Most of the central banks of the GCC have followed the Fed’s lead, and the UAE, Saudi Arabia, Bahrain, and Qatar have all implemented 25bps hikes to their own benchmark interest rates. For Kuwait, this was the first time in months that the central bank has matched the move in the US.

New home sales in the US were at 697,000 in June, 2.5% down from a downwardly revised 715,000 in May and missing projections of 725,000. This was the first monthly fall since February, suggesting that the aggressive hiking by the Fed since early last year is starting to weigh on demand in the housing sector.

Egypt’s state banks are offering new three-year dollar-denominated certificates to foreigners and locals as the authorities look to boost dollar liquidity and alleviate pressure on the Egyptian pound. The deposits with Banque Misr and National Bank of Egypt will earn 9% annually, with the interest paid in EGP.

Today’s Economic Data and Events

• 16:15, ECB deposit facility rate decision. Forecast: 3.75%
• 16:30 US initial jobless claims, week to July 22. Forecast: 235,000
• 16:30 US GDP annualised, q/q %, Q2. Forecast: 1.8%

Fixed Income

• US treasuries gained slightly after the Fed raised rates by 25bps yesterday, leaving the yield on the 2yr UST 2bps lower at 4.852% and the yield on the 10yr 1bps weaker at 3.867%.
• Yields on the 2yr UK Gilt rose almost 10bps to 5.008%, while the 10yr yield rose 2bps to 4.272%. German Bund yields also moved higher on the day, ahead of today’s ECB meeting, with both the 2yr and the 10yr yield gaining 6bps to 3.084% and 2.477%, respectively.

FX

• The dollar fell 0.5% against a basket of peers on Thursday, with markets interpreting comments from Chair Powell as indicative that the Fed’s tightening cycle is close to ending. GBPUSD and EURUSD both rose 0.3% to reach 1.2941 and 1.1086, respectively. USDJPY declined 0.5% to 140.24.
• Commodity currencies were weaker against the dollar on Thursday. AUDUSD fell 0.5% to reach 0.6758, NZDUSD dropped 0.2% to 0.6209, and USDCAD gained 0.3% to reach 1.3208.

Equities

• Equity markets had a comparatively weak day yesterday, despite the largely dovish interpretation of the FOMC decision and Jerome Powell’s commentary.
• The decision had been widely anticipated, so earnings season was likely the larger determinant of US equity moves yesterday. The Dow Jones added 0.2% but the S&P 500 closed flat and the NASDAQ lost 0.1%.
• Locally, the ADX added 0.4% and the DFM 0.6%. Saudi’s Tadawul closed 0.2% higher.

Commodities

• Oil prices lost some ground yesterday after the strong gains on Monday and Tuesday. Brent futures closed down 0.9% to USD 89.9/b, while WTI lost 1.1% to USD 78.8/b. Both benchmarks are up around 1.0% so far in trading this morning, however, buoyed by the dovish reading of last night’s FOMC hike.