Headlines

* Fed hikes by 25bps, nods to greater uncertainty after banking stress

* US Treasury Secretary Yellen stresses no protection for bank owners

* Bank of Canada didn’t debate hiking interest rates in March

* Dollar sinks to new lows last seen in early February as Fed outlook shifts

FX: USD is down for a sixth straight day. This was last seen in October 2021. The Fed softened its language about future rate increases after a 25bp hike.  The US Treasury 2-year yield fell below the widely watched 4% level, losing over 20bps after the Fed statement. It is trading just below the 200-day SMA. The 10-year yield also had a 20-point range and trading below the psychological 3.5% level.

EUR surged higher on the soft buck to 1.0912 before closing off that level. But this morning it has seen renewed buying pushing it up to 1.0929. GBP popped up to 1.2335 and is trading near that level in the morning session. Today’s BoE meeting is expected to bring a 25bp rate hike after red hot UK CPI data. USD/JPY fell back after touching its 50-day SMA at 132.52. It is close to 6-week lows this morning as US-Japan yield differentials narrow.  AUD has advanced north and is nearing the 200-day SMA at 0.6757.

Stocks: US equities struggled for direction in the aftermath of the Fed’s decision. The blue-chip S&P 500 swung between gains and losses before eventually closing 1.65% lower. The tech-laden Nasdaq 100 finished down 1.37%. The Dow lost 1.63%. Shares in First Republic, the hardest hit among the regional banks that have been suffering massive outflows of deposits, fell 15%. The KBW bank index slid 4.7%. US Treasury Secretary Yellen said the administration was not considering a broad expansion of bank deposit insurance or “blanket” guarantees for savers. This conflicted with a message from Fed Chair Powell.

Asian stocks diverged with Australia and Japan’s wider stock index softer while the Hang Seng was firmly in the green. The Hang Seng added 1.7%. Tencent gained as much as 5.8% after China’s most valuable company reversed two quartets of revenue declines. It said it was “well positioned” to benefit from an end of China’s zero-Covid policy.

US equity futures are firmly in positive territory. European equity futures are pointing to a lower open -0.4%. The Euro Stoxx 50 cash market finished higher 0.3%.

Gold made a strong comeback and has extended gains this morning. Falling US yields and the dollar are boosting the precious metal’s appeal. The key $2000 psychological level is just above.

Day Ahead – Fed hikes but could be near the end

 The Fed delivered a widely expected 25bps rate hike but dropped its reference regarding the view that ongoing rate hikes “will” be appropriate. It also left its terminal rate (2023 median “dot”) at 5.1%. The main message was dovish as the situation was uncertain. The bank stresses were causing a tightening in credit conditions which Powell said was equal to one rate hike.

That said, the Fed Chair emphasised that progress on inflation was still required and that the Committee was prepared to do more on rates if needed. He also said rate cuts were not in the baseline expectation for this year. Markets took a different view. There is around a 40% chance of one more 25bp hike in May. But then a 50% chance of a cut in July with two more to come this year. Is the market again underestimating the Fed’s determination to bring down inflation? Going forward, data will hugely important along with bank lending data. The latter will provide insight into how any uncertainty is affecting the real economy.

Chart of the Day – GBP/USD nears year-to-date highs

GBP has surprisingly been one of the top performers this year against its major peers. Most recently, sterling was boosted by the outsized CPI data yesterday which stayed in double digits. Money markets now fully price in a 25bps rate hike today by the BoE. There is also the strong probability of another rate move of a similar size by mid-year. Much will depend on how the MPC handle the banking crisis and whether sticky inflation worries policymakers into being more hawkish.

Cable is obviously benefitting form the weak dollar. It has moved above its 50-day SMA at 1.2146. Bulls will eye the January high at 1.2447 if they can close above yesterday’s top at 1.2335.