With both stock and bond markets plunging sharply yesterday, some market participants have already been reminded of the 2008 financial crisis. Actually, however, market participants are only trying to estimate what the appropriate response of central banks to persistently high inflationary pressures might be. The two-day Federal Reserve Open Market Committee meeting begins today. Tomorrow evening, after the Fed president’s press conference, we should be able to better assess the likelihood of recent market expectations regarding the Federal Reserve’s interest rate policy.
Until Thursday afternoon last week Market expectations regarding Fed and ECB monetary policy summarized as follows: The Fed is likely – as announced in early May – to carry out several further interest rate hikes of 50 basis points each before the end of the year. In turn, the ECB was supposed to make a series of interest rate hikes by 25 bp, which would bring the deposit rate to a supposedly neutral level around 1½% in the middle of next year. “Probably”, because the discussion about a “neutral” level of interest rates in the euro zone is still quite controversial.
Then on Thursday ECB he made an exclamation point, suggesting a possibility of a 50 bp rate hike at the September meeting instead of only 25 bp. Over fifty central banks around the world have already announced a 50 bp rate hike this year. Such a step was not expected from the ECB, as the central bank repeatedly stressed that the normalization of interest rates would be implemented “gradually”. Suddenly, however, it seems that steps by 50 bp by the ECB are also in the sphere of possibilities. Thus, the ECB itself made a significant contribution to market participants through its monetary policy decisions, given the possibility of a much steeper path of rate hikes.
On Friday then with the American inflation report another reason why investors are opting for an even tougher stance on monetary policy from the Fed. Data on consumer prices interrupted the development of the previous two months, from which analysts derived cautious signals about easing the price pressure. However, Friday’s report showed rising price pressure in almost all respects, effectively wiping out the effect of the two previous inflation reports.
A consequence of the ECB’s communiqué and US price data: investors priced in one for both central banks an even steeper path of a rate hike and a much higher maximum level of the key interest rate a. At the end of yesterday, the ECB priced the interest rate hikes to a total of over 175 basis points this year and the maximum level of interest rates at around 2½%. As far as the Fed is concerned, the discussion on the possibility of a rate hike by 75 bp gained momentum, with increases of over 275 bp was priced in this year alone. The expectations regarding the maximum key interest rate exceeded the 4% threshold. As a result, the profitability of 2L UST increased to 3.42% and thus to the highest level since 2008, the 2 / 10L yield curve was temporarily reversed. In Germany, the yield of 2-year Bunds for the first time since 2011 exceeded the threshold of 1.00%, and the real yield of the 10-year bond increased by no less than 30 bp in just two days.
Early today the situation on the market is calming down, the UST yields are returning even by 10bp, the Bund market is also a bit tougher. In the afternoon we will see data on US producer prices, in the coming evening important data on activity from China (retail trade, industrial production) – but ultimately this is how the Fed assesses the possibility of a 75 bp rate hike. In early May, Fed chairman Jerome Powell said that such an option was not being considered. A repetition of this statement would most likely allow a continuation of the correction movement in the bond markets, which is occurring today …
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The onemarkets blog (HypoVereinsbank – UniCredit Bank AG) first published the article Calming the market at the beginning of the FOMC meeting.