Oil trumps the Fed
The Fed left interest rates unchanged following yesterday’s meeting, as expected, and adopted a ‘wait and see’ stance in relation to the conflict in the Middle East, noting that “in the near term, higher energy prices will push up overall inflation, but it is too soon to know the scope and duration of the potential effects on the economy.” While US bond yields rose, US stocks fell, and the dollar firmed post the meeting, this was mostly in response to surging oil prices after Iran attacked a major gas facility in Qatar. Brent crude is up at around $114 a barrel this morning, while European gas prices have spiked sharply higher to €66 per MWh, an increase of around 21% from yesterday’s close. In FX, the euro and sterling are trading at about $1.1460 and $1.3260 respectively, both down about a cent from yesterday’s best levels, while EURGBP remains just below £0.8650. The ECB and Bank of England are both expected to leave interest rates unchanged today with markets awaiting their assessment of the impact of developments in the Middle East.
US government bond yields ended around 10bps higher in the 2-year area with 10-year yields up around 7bps. German and UK yields had earlier closed 4-6bps higher on the day, though they are playing ‘catch up’ with the US at the open this morning. In equity markets, European stocks shed just shy of 1%, while US indices were down around 1.5% at the New York close. Asian equities were mostly in the red overnight and European indices have opened lower again this morning (down almost 1.5%).
The Fed left interest rates unchanged in a range of 3.5% to 3.75% with one dissent in favour of a 25bps cut, down from two at the January meeting. The accompanying policy statement was little changed from January, noting that economic activity has been expanding at a solid pace, job gains have remained low, and inflation remains somewhat elevated, and adding that “the implications of developments in the Middle East for the U.S. economy are uncertain”. Forecasts for growth and inflation in 2026-2027 were revised up, thought the interest rate ‘dot plot’ continued to indicate one quarter-point cut in rates this year.
The unemployment rate in the UK nudged down to 5.2% in the three months to January according to this morning’s labour market report, while employment rose by 0.2%, or 84k, over the same period. Private sector earnings growth eased to 3.3% year-on-year, the slowest pace of increase since late 2020.
As well as the ECB and Bank of England policy announcements, economic data due today include construction output and labour costs in the Euro area and weekly jobless claims and new home sales in the US.