US Fed hikes by 25bps

The US Fed hiked rates by 25bps yesterday at its May FOMC meeting in what is likely to be the last upwards move in this extraordinarily rapid tightening cycle which has seen a cumulative 500bps worth of hikes over the past 14 months, the most aggressive since the 1980s. This takes the upper bound of the Fed Funds Target Rate to 5.25%. The move was well expected by both ourselves and markets, so all eyes were on the post-meeting statement and commentary by Jerome Powell for any indication as to the Fed’s next move. Crucially, the FOMC statement omitted the previous line that the committee ‘anticipates that some additional policy firming may be appropriate’, while Powell pledged at the presser to further movements would be data dependent. He also said that the likelihood that the US managed to avoid a recession was greater than there being one, and that the US banking sector was ‘sound and resilient’ as questions remain over the stability of a number of mid-size lenders. The Fed’s move has been followed by local central banks in the UAE, Saudi Arabia, Qatar, and Bahrain.

The US labour market has shown surprising resilience so far in the face of the Fed’s hiking cycle, and while some indicators had been starting to slow in recent months, the ADP employment print released yesterday surprised to the upside with a gain of 296,000. This was beat expectations of 150,000 and was up on 142,000 the previous month, making it the strongest print since last July. The bulk of the gains in jobs came in leisure and hospitality, while manufacturing and financial services lowered headcount. Positively for the Fed’s battle with inflation, however, wage growth slowed to 13.2%, down from 14.2% previously, making it the lowest reading since November 2021.

Turkey’s CPI inflation slowed to 42.7% y/y in April, beating expectations of 44.1% and down from 50.5% in March. This marked the slowest pace of annual price growth in a year and almost half what it was at the recent peak, but prices were 2.4% higher than the previous month, compared with 2.3% m/m in March. Core inflation slowed to 45.5% y/y, from 47.4% previously. Loose monetary and fiscal policy, the after effects of the earthquakes this year, and pre-election activity all pose upside risks to price growth in the coming months.

Today’s Economic Data and Events

• 16:15 Eurozone deposit facility rate. Forecast: 3.25%
• 18:00 US New home sales March: forecast 630k
• 18:00 US Conference Board consumer confidence April: forecast 104

Fixed Income

• The Federal Reserve hiked the Fed Funds rate by 25bps at its May FOMC meeting, bringing the target rate up to 5.25% on the top end. The move came in line with our expectations, as well as the markets, and we believe marks the end of the Fed’s hiking cycle. The Fed did adjust some language in its statement to water down the prospects of any further tightening while chair Jerome Powell’s press conference didn’t commit the Fed to hiking again at the next FOMC in June.
• Central banks in Saudi Arabia, the UAE, Qatar and Bahrain have all raised policy rates by 25bps in response to the move from the Fed.
• US Treasuries rallied in response to the rate hike by the Fed as the market believes this is the first move in a pivot toward more accommodative policy by the end of the year. Yields on the 2yr UST fell 16bps to 3.8048% while the 10yr dropped by about 9bps to 3.3356%. Markets have brought expectations for cuts forward to July, albeit only tentatively priced in and are still targeting Fed policy rates at 4.5% by the end of the year.
• Bond markets in Europe will be up next as the ECB meets today with expectations still split on whether a 25bps of 50bps is likely. Markets are edging more toward a 25bps move given the slowdown in core inflation in the latest print. Yields on the 10yr bund closed marginally lower at 2.244%. Gilt yields pushed higher, however, up by about 3bps to 3.689%.

FX

• The likely final rate hike from the Fed helped to push the dollar lower against peers overnight, particularly as the ECB is still likely to give a hawkish view when it sets policy later today. EURUSD added almost 0.6% overnight to close at 1.1062 while GBPUSD gained 0.8% to settle at 1.2564. USDJPY moved lower in favour of the yen, trading at 134.71, down by 1.4%.
• Commodity currencies were also in favour with USDCAD showing a marginal bias in favour of the loonie with AUDUSD added 0.1% to 0.6671 and NZDUSD rose by 0.3% to 0.6229.

Equities

• Initial positivity in US markets following the Fed’s interest rate decision was subsequently wiped out as Jerome Powell pushed back against the chance of an imminent pivot, and all three major US benchmark indices ended the day lower. The NASDAQ, the S&P 500, and the Dow Jones dropped 0.5%, 0.7%, and 0.8% respectively.
• There was more positivity in Europe where the composite STOXX 600 added 0.3%.
• Locally, the DFM added 0.1% while the ADX ended the day 0.3% lower.

Commodities

• Oil prices had another heavy day of trading, selling off rapidly in early hours of the day. Brent futures fell by almost 4% on the close to settle at USD 72.33/b while WTI fell 4.3% to USD 68.60/b, its first close below USD 70/b since March.
• Russia’s energy minister Alexander Novak said the producers’ alliance was monitoring the current sell-off in oil and noted it may be temporary, forestalling expectation of another surprise production cut.
• US commercial crude stocks fell by 1.3m bbl last week, according to EIA data, while gasoline stockpiles were higher and distillates fell. US oil production continues to hover around 12m b/d, up 100k b/d last week to 12.3m b/d.