Markets look ahead to FOMC decision

All eyes will be on the FOMC later today as the Fed sets policy amid strain in financial markets. A sense of calm has set in over the last few days as financial and monetary authorities have taken substantial steps to shore up confidence in the financial system. US Treasury Secretary Janet Yellen said the US would step in to safeguard depositors at small banks if they ran into financial distress, saying the government was “resolutely committed” to preserving financial stability. Markets will be parsing the statement from the FOMC for commentary about the recent stress in financial markets and also whether the dots plot signals a slower path of tightening ahead or even affirms the markets’ view of rate cuts.

Previously owned home sales in the US rose by almost 15% m/m to 4.58m in February, far stronger than market expectations and a turnaround from a year-long decline in housing market activity. A drop in mortgage rates contributed to the strong print from the housing market while median selling prices were slightly lower year/year.

The ZEW survey of investor sentiment in Germany declined in March to 13 from 28.1 on the expectations component. The assessment of current conditions remains negative at -46.5, down from -45.1 in February.

Inflation in Dubai rose by 4.9% y/y in February, up from 4.6% a month earlier. A pick-up in food prices (up 6.3% y/y) along higher costs for clothing helped to keep overall prices high m/m. Recreation and culture prices continue to rise at a substantial rate, up 21% y/y, even though they represent a small share of the overall index. Housing costs rose by 4.9%, up from 4.4% a month earlier while transport cost inflation slowed slightly to 4.3% from 4.6% previously.

Today’s Economic Data and Events

• 11:00 UK CPI y/y Feb: forecast 9.9%
• 12:00 SA CPI y/y Feb: forecast 6.8%
• 22:00 US FOMC rate decision upper bound: forecast 5%

Fixed Income

• US Treasuries sold off as risk appetite returned to markets. Yields on the 2yr UST closed back above 4%, rising by 19bps overnight to 4.1664%, while the 10yr added 12bps to settle at 3.6094%. Market pricing for a rate hike of 25bps from the Fed later this evening has crept higher with markets pricing in an 82% chance of a hike later today.
• European bond markets also came under heavy selling pressure thanks to a return of risk appetite. Yields on 2yr German government bonds rose 26bps to 2.587% while the 10yr yield added 17bps to 2.284%. Gilt yields also edged higher, up 6bps to 3.361%.
• Bank al-Maghrib, Morocco’s central bank, hiked rates by 50bps to 3% as the North African economy grapples with historically high inflation. The Bank noted that some external pressures were easing but that “domestic supply shocks” in the food sector would add more sustained upward pressure to prices.
• Moody’s affirmed their ‘Aa2’ on Abu Dhabi’s sovereign rating and maintained a stable outlook.

FX

• The dollar sank a fourth day in a row as risk appetite returned to markets, at least somewhat. Price action today will be choppy ahead of the Fed as markets will be more focused on the FOMC’s views on financial stability than inflation.
• EURUSD rose by 0.4% to 1.0768 while GBPUSD lingered and dropped, down 0.5% to 1.2217. USDJPY reversed some of its losses earlier in the week, rising by 0.9% to 132.51. Commodity currencies had a rough showing with USDCAD up by 0.4% at 1.3713, AUDUSD down 0.7% at 0.6669 and NZDUSD sinking a second day running, down 0.9% at 0.6194. 

Equities

• Easing concerns around the banking sector unrest continued to drive equity markets higher yesterday, with almost all major indices closing higher. In Europe, the DAX and the FTSE 100 were the outperformers as they both closed up 1.8%.
• In the US, the Dow Jones gained 1.0%, the S&P 500 gained  1.3%, and the NASDAQ ended the day 1.6% higher.
• Locally, the DFM added 1.1% while the ADX closed flat.

Commodities

• Oil prices continued to stabilize overnight after some heavy selling in the past week. Brent futures added 2.1% to USD 75.32/b while WTI added 2.5% to USD 69.33/b. The rapid sell off in oil was wholly a sentiment crash rather than a shift in fundamentals: prices for industrial metals didn’t show the same kind of disorderly sell off in tandem with crude oil.
• The API estimated that crude inventories in the US rose by 3.3m bbl last week though there were draws in both gasoline and distillate stockpiles.