Happy St. Patrick’s Day! Once considered a strictly religious holiday in Ireland, with pubs closed nationwide, in 1970 the law was overturned and the stout was poured with pride!
As we had expected, the FOMC did not move to raise rates yesterday, and in fact surprised the market with its more dovish than expected stance; revising the dot plots down to two (and a quarter) rate hikes this year from four back in December, the median dot is now at 0.875%. The benchmark 10-yr UST climbed to 1.997% ahead of the meeting, falling ~10bps by the end of the session. On balance the US economy has shown signs of stability and in some sectors, i.e. the job market, further strength. What continues to remain of concern to the central bank members is the spillover from “global economic and financial developments” which have recovered somewhat off the lows seen earlier this year.
Despite core inflation surprising on the upside more recently - core CPI for February was at 2.3% yoy, the highest reading since April 2012 - Fed Chair, Yellen warned that recent strengthening “may reflect volatile times”. It seems that subdued inflation remains of concern with Yellen warning that although inflation expectations remain “reasonably well anchored”, the “stability of longer-run inflation expectations cannot be taken for granted”.
In regards to future rate hikes, Yellen said that “caution is appropriate”, but she insisted at her press conference that it would be better to raise rates once the economy accelerates and not fall behind the curve, and on the flip side she said the central bank cannot afford to be too rash in cutting rates if the economy begins to show signs of faltering. She did however state that April remains “live”, but the futures market says otherwise; pricing in less than a 40% chance of a hike before June. We have said for some time that the Fed will struggle to hike rates this year, with our Fed Funds rate expectation back in January at below 1% for 2016.
The FOMC participants kept the forecast for core inflation steady at 1.6%, but lowered economic growth projections to between 2.1-2.3% in 2016, from 2.3-2.5%. The dollar fell victim to the committee’s dovish projections, falling over 1% (DXY index) after the statement was released yesterday and is down a further 1.15% today, at time of writing.
The FOMC statement was well received by the market which saw a risk-on appetite across markets, this was also helped by the bounce in crude; with Brent floating above $41pb. According to reports, Saudi Arabia and Russia along with other OPEC and non-OPEC producers are to meet on April 17 in Qatar to discuss measures to reduce/freeze output; regardless of Iran’s refusal to cooperate. Qatar’s Energy Minister Al-Sada yesterday stated that around 15 producers both within and outside the cartel, who support ~73% of global output, are all for the initiative.
Our Russian quasi-sovereign holdings have benefited from the improved sentiment, with for example Gazprom 8.625% 2034 rallying over a point, the yield falling ~15 bps today to just below 7%. Russian Railways 7.487% 2031 also continued its upward assault. Having traded at a yield of ~8.95%, the bond has rallied 11 points from the January lows and is now trading at a yield of 7.6%! Long may the sentiment continue.