Rising LIBOR Rates

Rates market had an eventful week with Fed Chair, Jerome Powell’s first congressional hearing and President Trump’s proposal to implement tariffs on steel (25%) and aluminium (10%) imports. Even if the US tariff measures are ultimately more limited than currently proposed, great damage is being done to investors’ sentiment right now. Foreign investors, upon whom the US relies to finance its trade and fiscal deficit, see the imposition of tariffs as bad for the US economy and financial markets. And therefore despite the slightly hawkish tone of Powell’s testimony, USTs failed to sell-off materially. We continue to expect US rates to consolidate around current levels, and do not see the year-to-date sell-off in rates as the beginning of a protracted period of bear market.

On the data front, the final reading for the U of Michigan consumer sentiment index was largely unchanged at 99.7 vs. prior 99.9. That leaves the index as still the second highest level since 2004. Also the rise in the ISM manufacturing index in February to 60.8, from 59.1, a 13-year high suggests that activity growth is set to pick up following a soft start to the year. On past form, the index is consistent with real GDP growth of more than 5% annualised.

3m LIBOR vs Fed Target Rate

Source: Bloomberg, Emirates NBD Research

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