Goldman: Not All Hike-Related Surprises Are Created Equal

Goldman Sachs note that “historically, the Fed has not had a tendency to surprise meaningfully during a hiking cycle, with smaller central banks a more frequent source of surprises when rates are rising. With the rapidly evolving picture and discussion around the potential for larger (e.g. 50bp) moves, however, the risk of surprises versus what’s priced may be more meaningful than in the past. We have looked at how yields respond to policy rate surprises (measured as the gap between what was priced and realised), finding that the front end tends to be most sensitive, and that yield moves are more strongly correlated with surprises when they are larger. Considering the possible surprises in a hike cycle, either a hike is delivered but diverges from pricing, or the central bank keeps rates on hold when some probability of a hike was priced, we find that in general “hike surprises” are more impactful and significant across the curve. Additionally, there is more evidence of follow-through, where the front-end in particular tends to “extend” the impact of the surprise over the subsequent week after a hike. The implication heading into the March FOMC would seem to be that for participants looking to fade the potential of a 50bp move (assuming current pricing holds), there is value to receiving front-end rates (beyond just the March meeting OIS) and holding the position beyond the meeting. In the current environment, however, we think a 25bp move is more likely to see the market redistribute the surprise to price a faster subsequent pace of hikes, and we therefore continue to favour Jun/Dec FOMC OIS steepeners.”