Post-FOMC Pricing

A relatively high bar was set for a hawkish surprise at yesterday’s FOMC, with Fed Chair Powell pushing back against any suggestion of an imminent Fed hike, based on the economic data to hand.

• Still, he showed greater caution when it came to the progress on guiding inflation back to target, effectively further deferring rate cuts.
• The Fed also provided a more forceful QT taper than almost anyone anticipated (more on that to follow later).
• While Powell’s communique could not be deemed outright dovish, the high bar for a hawkish surprise, coupled with the liquidity developments surrounding the QT taper decision, have provided a modestly dovish market reaction.
• FOMC-dated OIS failed to price below 25bp of ’24 cuts during the extension of the hawkish repricing seen in recent days, with SFRZ4 moves below 95.00 limited as a result. ~36bp of ’24 cuts are now priced.
• 2-Year Tsy yields are back below 5.00%, after registering fresh year-to-date highs above that level in the run up to the FOMC.
• The broader USD has come under pressure, with Fed developments preventing a retest of April’s ‘24 highs.
• What looked like fresh Japanese intervention in the JPY has also factored into that move.
• However, the likes of GBP were already slightly more resilient than it had been in previous instances of USD demand, with cable failing to get anywhere near testing $1.20.
• Gold has found a bit of a base after the recent pullback from all-time highs, while copper futures have struggled to rally. Broader considerations always have to be accounted for here, whether that be Chinese demand or geopolitical matters.