Dollar slightly weaker post Fed meeting
The Fed left interest rates unchanged in a range of 3.50%-3.75% yesterday, though three of the twelve voting members preferred an immediate 25bps hike. Despite the latter, and Fed Chair Warsh’s pledge that the central bank will not ‘waiver’ in returning inflation to target, the market pared back the chances of rate hikes over the balance of this year, prompting a decline in US short-dated bond yields and a modest weakening of the dollar. US long-dated bond yields rose quite sharply post the meeting however, driven by an increase in (market) inflation expectations, suggesting that, while Warsh is certainly talking the talk on getting inflation back to target, he will have to eventually walk the walk by raising interest rates to help do so. Next up it’s the Bank of England’s latest interest rate decision, due at noon today. Softer than expected UK inflation recently and moderating wage growth should persuade a majority of the (nine) Monetary Policy Committee members to keep rates on hold, though there is likely to be a couple of dissents in favour of a rate hike. Ahead of this, the euro and sterling are trading at around $1.1440 and $1.3340 against the dollar respectively, about half a cent higher than yesterday morning, while EURGBP is largely unchanged at around £0.8570.
The market has pared back the chances of a Fed rate increase in September to around 70% (from 100%) following yesterday’s meeting and is now pricing about 35bps of hikes by the end of this year, down from just over 40bps. While this contributed to a decline in US short-dated yields (2-year yields ended a couple of basis points lower on the day), long-dated yields rose sharply post the meeting, with 10- and 30-year yields closing around 8bps and 12bps higher respectively. German 2- and 10-year yields had earlier finished up around 6-7bps, while equivalent UK yields rose by 10-13bps. In equity markets, US stocks sold off post the Fed meeting, pressured by rising bond yields, with the main indices ending 1.5% to 2% lower on the day.
ECB member Patsalides says “second-round effects (from the energy price shock) are not evident…wage demands are contained…inflation is more or less in line with the expected path (and) inflation expectations are anchored,” suggesting that, overall, interest rates are “at the right level.”
It’s a busy day ahead. As well as the BoE rate decision, there’s plenty of economic data scheduled including preliminary estimates of Q2 GDP growth in both the Euro area and US. PCE inflation for June is due in the US, while a flash estimate of CPI inflation in July is due in Germany (ahead of inflation data for the Euro area tomorrow).