KBC Sunrise Market Commentary 22/09/2022 via Trader Talent

Markets

•          In advance, markets were divided whether the Fed would hike by 0.75% or 1.0%. In fact, it delivered a ‘hawkish’ 75 bps hike, raising the target for the Fed Fund rate to 3.00/3.25%. The Fed statement was an exact copy of end July. Ongoing increases in the policy rate will be appropriate as inflation remains elevated, reflecting supply and demand imbalances, higher food and energy prices and broader price pressures. The SEP (dots) confirm the case for further tightening. Despite the rate hikes already put at work before yesterday, Fed governors still raised projections for PCE inflation to 5.4% this year (from 5.2%); 2.8% in 2023 (from 2.6%) and 2.3% in 2024 (from 2.2) with inflation only returning to target in 2025. Fed governors see the Fed fund rate at 4.4% end this year (3.4% June), at 4.6% end 2023 (from 3.8%) with a moderate easing not seen before 2024 (3.9%) and 2025 (2.9%). Restrictive policy will have a price in terms of growth with 2022 growth at 0.2% (from 1.7%), 2023 at 1.2% (from 1.7%) and 2024 at 1.7%, all below trend growth (1.8%). Unemployment is forecast to rise from 3.8% end this year to 4.4% in 2024. At the press conference, Chair Powell reiterated the Fed has to move policy well into restrictive territory to bring supply and demand back in balance and cool an extremely tight labour market. Policy currently only entered the early stages of restrictive territory. Cooling down inflation needs a period below-trend growth and for that to happen policy will have to stay restrictive for quite some time (no rate cuts soon). Markets reacted volatile after the Fed announcement and during the press conference. However, at the end of the day screens showed a further hawkish repositioning. The US yields curve flattened with the 2-y gaining 8.6 bps. The 30-y lost 6.85 bps. Markets now discount a peak policy rate between 4.50%/4.75%. The trade-weighted dollar got is break higher. DXY trades near 111.55 (highest since 2002). EUR/USD dropped below the 0.9864 YTD low (currently 0.9831).

•          The BOJ remains ‘last man standing’, maintaining its ultra-easy policy (Cfr infra). Later today, the Bank of England, the Swiss national bank and the Norges bank decide on policy. Especially for the BoE it will be interesting to see whether they join the ’75 bps’ club. This morning, US yields stay upwardly oriented post-Fed and so does the dollar. Asian markets continue trading in risk-off modus.

News Headlines

•             The Bank of Japan stuck to its ultra-easy monetary policy, keeping the policy rate unchanged at -0.1% and continuing to defend a yield cap for the 10-yr government bond yield (0.25%). The BoJ kept its forward guidance on keeping rates low or lower and repeated its commitment not to hesitate to add easing if needed. A Covid-related aid program will be phased out instead of ending it abruptly. The Japanese yen spiked lower on the outcome with USD/JPY temporary above 145 for the first time since 1998, keeping the intervention threat more than alive. It’s hard to see them being effective though given the gigantic split between a hawkish Fed and a dovish BoJ.

Graphs

Calendar & Table

This document has been prepared by the KBC Economics Markets desk and has not been produced by the Research department. The desk consists of Mathias Van der Jeugt, Peter Wuyts and Mathias Janssens, analists at KBC Bank N.V., which is regulated by the Financial Services and Markets Authority (FSMA). Read the full disclaimer.