• The presumed calm of the countdown to this evening’s Fed decision was abruptly unsettled by a speech of Russian president Vladimir Putin around the start of European dealings. Putin announced a ‘partial mobilization’ of reservists. He also said that ‘If the territorial integrity of our country is threatened, we will use all available means to protect our people’ which only can be seen as an escalation of the military rhetoric. The headlines (temporary) caused a different risk-off compared to what happened of late. The Dutch reference gas contract returned north of € 200 Mwh. Brent oil also jumped from the $90/b area to $93/b. German Bunds temporary enjoyed a safe haven bid with yields easing up to 10 bps. However, yield declines in the swap market were much more limited and both German and European yields gradually reversed a big part of the initial losses. Currently, the German 2-y yield even trades higher again (+3.5 bps). Bonds at longer maturities still preserve some safe haven gains (30-y -6 bps). With the 2-y swap setting a new cycle top at 2.75% (+7 bps), markets concluded that this escalation doesn’t ease the inflationary risks the ECB has to cope with. The dollar again was the main beneficiary from growing geopolitical and economic uncertainty in Europe. EUR/USD (currently 0.991) slipped (temporary?) below 0.99, but the 0.9864 correction low for now survived. DXY set a minor correction top (110.86). USD/JPY (144.05) nears the key 145 reference. For US investors/markets, the focus remains on this evening’s Fed meeting. Contrary to the previous days, US bond markets shifted into wait-and-see modus. Yields are easing marginally (2-y -1bp, 30-y -3 bps). US equities gain marginal ground after the open (S&P +0.50%), but this for sure isn’t a short-covering move of a market that feels pressured to reduce established bearish bets. Sterling is in slightly better shape. The UK government announcing a new fiscal package to cap energy costs for businesses (cf infra), apparently makes markets tilt to a growing chance of the BoE joining the club of 75 bps hikes tomorrow. Sterling slightly outperforms the euro (EUR/GBP 0.8735). Still, the UK currency touched a new 37-year low against the dollar (currently 1.134). Rising tensions on Ukraine understandably also weighed in CE currencies with the Czech krona (EUR/CZK 24.64), the forint (EUR/HUF 404.5) and the zloty (EUR/PLN 4.75) all fighting an uphill battle.
• At 20:00 CET the Fed will announce its policy decision with Powell’s press address at 20:30 CET. A 75 basis points rate hike is fully discounted with markets seeing about a 1 in 4 chance for a 1.0% step. The new dot plot summarizing expectations from the individual governors probably is at least as important as the size rate move. Quid on the governors’ expected inflation path? Quid on the new anticipated rate path? Quid on the long term neutral policy rate? At the June dots, Fed governors on average saw the Fed fund rate at 3.4% end this year and peaking near 3.8% next year. Markets currently already discount a rate peak near 4.5% in Q1 next year. Will Fed governors even exceed market pricing? A reassessment of the neutral rate ( 2.5% in June), also could change the reference on how tight policy is. Markets expect a hawkish Fed. Powell and Co probably will bring a hawkish message. Even so, for now we don’t expect a sustained buy-on the rumour, sell-the-fact profit taking move on the recent yield rally.
• The UK government unveiled its Energy Bill Relief Scheme, aimed to help businesses and other non-domestic customers. The government will cap electricity prices at 21.1 pence/Kwh and at 7.5 pence for gas. That’s around 50% discount for the coming six months. Afterwards, a review will decide whether additional support is needed and for which sectors. The package is estimated to cost £40bn. Businesses that have signed fixed energy contracts since April 1 will have their rates retroactively discounted. The EBRS is different from the government’s Energy Price Guarantee for households which could costs as much as £130bn.