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Fed Chair plays down 75bp hikes (again)

OVERNIGHT

Asian equity markets mostly rebounded after Fed Chair Powell reiterated that policymakers are not ‘actively considering’ 75bp rate rises. Chair Powell reiterated that the Fed is likely to hike by 50bp in the next two meetings in June and July and said that achieving a soft landing for economy will be ‘quite challenging’ and will ‘include some pain’. There remain ongoing concerns about Covid infections in China.

THE DAY AHEAD

There are limited economic data releases out of the UK and the Eurozone today. We expect Eurozone industrial production for March to fall by 1.8%m/m, partly reflecting the sharp 5.0%m/m drop in German output which highlights the impact of the war in Ukraine on the country’s industrial activity. Nevertheless, given that Eurozone CPI inflation has risen to 7.5%, there is still a focus on the increasing likelihood that the ECB is preparing for a July interest rate lift-off. Several ECB speakers have indicated that they favour or are open to a July hike. Notably, Bundesbank President Nagel favours a July rise, while President Lagarde has indicated that it is on the table. The ECB’s Centeno, Nagel and Schnabel are all scheduled to speak today.

US data in the afternoon session include import price inflation data and the University of Michigan consumer sentiment survey. Consumer sentiment rose in April for the first time in four months to 65.2 as a strong labour market appeared to outweigh concerns about rising inflation. It is nevertheless sharply down from a year ago, and we expect it to dip to 63.5 for today’s preliminary May reading.

US Fed speakers include Kashkari and Mester. The Fed last week increased rates by 50bp, the biggest rise since 2000, and confirmed that the reduction in its balance sheet (reversing QE) will commence in June. As noted above, Chair Powell indicated that 50bp rises at the next two meetings in June and July are likely which would bring the top end of the target range for the fed funds rate to 2%. That would be close to the neutral rate estimated to be somewhere between 2-3%. It is not clear at this juncture whether rates will have to rise above the neutral level to tame inflation which would likely to materially slow the economy.

The UK focus will turn to next week when key data releases include CPI inflation and labour market data. Bank of England Governor Bailey and other Monetary Policy Committee members will testify to the Treasury Select Committee on the latest Monetary Policy Report published alongside the decision last week to increase Bank Rate by 25bp to 1%.

MARKETS

Some apparent calm in the cryptocurrency market may have contributed to the more constructive risk tone overnight. Benchmark US 10-year Treasury yields rose slightly but remain below 2.90% and down from last week. In the currency markets, the pound eked out a modest rise to just above 1.22 against the US dollar and is little changed versus the euro at around 1.1750.

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