Please ensure Javascript is enabled for purposes of website accessibility

Fed hikes by 75bps, signals more to come

Daniel Richards - MENA Economist
Published Date: 22 September 2022

 

The Federal Reserve hiked its benchmark interest rate target range by 75bps for the third time in a row yesterday, taking it to 3.25% at the upper bound, in line with our expectations. The move was accompanied by some particularly hawkish messaging and projections that have rattled markets overnight. During his press conference, Fed Chair Jerome Powell spoke of recession risks and the diminishing likelihood of a soft landing as monetary policy needed to be ‘more restrictive or restrictive for longer’ as the central bank seeks to dampen inflation. Indeed, the new dot plot of interest rate projections now sees the fed funds rate rising to 4.4% this year and peaking at 4.6% in 2023. This compares with the June projection of 3.8% next year and brings the FOMC’s projections in line with our own. The economic outlook has also deteriorated, with the Fed now expecting unemployment to rise from the current 3.7% to 3.8% next quarter and 4.4% by end of next year. GDP growth is expected to slow to 0.2% this year and 1.2% in 2023, and while a recession has not been explicitly forecast, the forecast rise in unemployment and the refusal to rule it out means that it is far from off the table.

Following on from the support for households announced earlier this month, the UK Business Secretary Kwasi Kwarteng has announced measures aimed at softening the impact of the energy crisis on businesses. The ‘supported wholesale price’ will likely see electricity be capped at GBP 211/MWH, while gas will be capped at GBP 75/MWH. Discounts will be applied automatically to businesses’ bills and will remain in place for the next six months. Coming alongside the tax cuts planned by PM Liz Truss, this will weigh further on the UK’s finances – at GBP 11.1bn, public sector net borrowing exceeded projections (GBP 8.1bn) in August in data released yesterday. The so called mini budget is expected on Friday which should provide more detail on the governments plans, including a potential stamp duty cut.

In a big day for global monetary policy, the Bank of England is set to announce its MPC rate decision later today, with a 50bps hike expected. Aside from the US and Brazil which have already made their rate moves over night, coming up through the rest of the day we also have decisions from Japan, Turkey, Egypt, South Africa, Switzerland, Indonesia, Norway, Philippines, and more besides.

Key economic data and events

15:00 UK Bank of England rate decision. Forecast: 2.25%

15:00 Turkey central bank rate decision. Forecast: 13:00%

16:30 US initial jobless claims, week to September 17. Forecast: 217,000

Egypt central bank rate decision. Forecast: 11.75%

Fixed Income

  • US Treasuries slumped as the Fed delivered on its 75bps hike but also accompanied the hike with aggressively hawkish messaging and expectations. Another 125bps of hikes may be on the cards by the end of the year and the median projection for rates has gone up to 4.6% for 2023, compared with 3.8% previously. Using “pain” in his commentary, Jerome Powell is seeming to prepare markets that a recession in the US is imminent.
  • The 2yr UST yield spiked and sank immediately after the hike but then extended its move higher over the rest of the day to settle at 4.084%, up 8bps and its first time above 4% since before the Global Financial Crisis. The 10yr UST yield actually settled lower overnight, down 3bps to 3.5299%, perhaps as markets gauge an eventual easing of policy.
  • Market pricing has adjusted to a peak in the Fed Funds rate to around 4.6% by the middle of next year and now longer look to be pricing any downward adjustment as the impact of higher rates becomes clearer.
  • European bonds managed to gain overnight despite the hawkish Fed and an escalation of geopolitical tension as Russia has announced a partial mobilization of its armed forces. The 10yr bund yield dropped by 3bps to 1.886%. In the UK, gilt yields dropped by 2bps ahead of today’s Bank of England meeting where the MPC is expected to hike by 75bps.

FX

  • The Fed’s hawkishness along with heighted geopolitical risk helped the US dollar soar overnight with the DXY index hitting a record level. EURUSD dropped by more than 1.3% to 0.9837 as the ECB is unlikely going to be able to match the Fed’s assertiveness on policy while GBPUSD fell by nearly 1% to 1.127. Both currencies are extending their losses in early trade today. USDJPY has also pushed higher, up by 0.2% overnight to 144.06 with no change expected from the Bank of Japan today.
  • Commodity currencies slumped in response to the Fed with USDCAD up by 0.7% to 1.3463 while AUDUSD fell by 0.88% to 0.663 and NZDUSD dropped by 0.7% to 0.5853. There doesn’t appear to be any consolidation in currency markets in early trade after the Fed with all FX markets extending their losses against the dollar.

Equities

  • US markets slumped on the back of the hawkish messaging from the Fed yesterday. Both the Dow Jones and the S&P 500 lost -1.7%, while the NASDAQ dropped -1.8%.
  • Prior to the FOMC meeting, there had been some positivity in Europe as most major indices enjoyed gains. The FTSE 100, the DAX, and the CAC added 0.6%, 0.8% and 0.9% respectively.
  • Asian markets are following the US into the red so far this morning, with the Nikkei down -1.0% and the Hang Seng -1.6%.

Commodities

  • Oil prices dropped overnight in response to the aggressive messaging coming from the Federal Reserve. Benchmark futures reversed an earlier spike in response to the news that Russia was partially mobilizing its armed forces with Brent future closing down 0.9% at USD 89.83/b and WTI falling by 1.8% to USD 82.94/b.
  • Data from the EIA showed a modest build in crude inventories last week, up by 1.1m bbl along with a gain in gasoline and distillate inventories. Oil production in the US was flat, at 12.1m b/d.

Click here to download charts and tables