US equity and Treasury markets rallied following the Fed policy update yesterday. Asian stocks overnight are also mostly higher. The Fed hiked again but the 25bp increase (to 4.75% as expected) was the smallest since last March. Although Chair Powell signalled further rate rises and pushed back against market expectations for rate cuts later this year, there was acknowledgement that inflation has ‘eased somewhat’. He indicated that there would probably be ‘a couple’ more rate hikes. Overall, it appears that the Fed was less hawkish than markets had feared.
Following on from the Fed yesterday, the Bank of England (BoE) and the European Central Bank (ECB) will both provide policy updates today. Both central banks are expected to raise interest rates again. The BoE announcement is at midday and the press conference with Governor Bailey kicks off at 12:30GMT. The ECB announcement is at 13:15GMT and the press conference with President Lagarde begins at 13:45GMT.
For the ECB, another 50bp hike has been telegraphed by policymakers, which would raise the deposit facility rate to 2.5%. The Eurozone economy avoided contraction in Q4 and, while inflation has started to fall, rate-setters remain concerned that core inflation is trending higher. With today’s decision fully discounted, markets will be looking for clues that another 50bp hike is on the cards for the next meeting in March, as favoured by more hawkish members of the ECB Governing Council.
There is a bit more uncertainty for the BoE decision, but markets are pricing in a high probability of another 50bp rise to 4%. While a couple of MPC members will probably continue to vote against a rate rise, the majority will point to upside inflation risks including from wages and services prices. Aggregate inflation is set to fall this year, but stickier services inflation provides the justification for a further hike today. Economic growth forecasts could also be revised higher. Markets will be watching closely for indications on whether the door for interest rates to rise above 4% is left open. Governor Bailey recently indicated that market expectations for around a 4.5% peak in rates were not ‘out of line’.
In the US, durable goods orders and weekly jobless claims data are due. Ahead of tomorrow’s monthly jobs report, initial jobless claims are expected to edge higher from the prior week but to remain historically low, reaffirming that the labour market remains tight.
Following yesterday’s Fed decision and ahead of the BoE and ECB updates, GBP/USD and EUR/USD have risen towards 1.24 and above 1.10, respectively. That means the pound is also trading at bottom of the recent range against the euro. US 10-year Treasury yields were broadly steady during Asian trading, having fallen to around 3.40% post-Fed.
