Powell Takes The Edge Off

TYM2 deals around late NY levels, last -0-02 at 119-03.

• To recap, the curve twist steepened on Wednesday, with 2s and 3s richening by ~14bp, while 20s and 30s were ~2bp cheaper on the day, with the major benchmarks finishing a little shy of richest levels registered late in the N session. Tsys were bid in the wake of the latest FOMC decision after the Fed went ahead with the expected/flagged 50bp rate hike and B/S normalisation process, while Chair Powell pushed back against the idea of 75bp rate moves, pointing markets towards 50bp hikes over the next couple of meetings, while touching on well defined risks surrounding the Chinese COVID situation, the Russia-Ukraine conflict and the domestic economic backdrop.
• Powell’s comments facilitated the removal of some rate hike premium from the short-end, with just over 50bp of tightening now priced for the June FOMC (after markets flirted with a ~50% probability earlier in the day), while the OIS strip now prices a year end Fed funds rate of 2.95%, down from the 3.15% seen earlier on Wednesday.
• Block buys in FV (+5K) & TY futures (+9K) helped the general direction of travel post-FOMC decision)
• Domestic data came in on the softer side, with ADP employment and the latest ISM services data missing wider expectations.
• Chinese markets return from their elongated weekend on Thursday, although the final day of the Japanese holiday means that cash Tsys will be closed until London dealing.
• Regional reaction to the FOMC decision will likely set the tone during Thursday’s Asia-Pac dealing, with Chinese Caixin services & composite PMI providing the data highlights overnight. Post-holiday flows in the Chinese equity space and the first PBoC CNY mid-point fixing of the month will also garner attention.
• Looking ahead, the latest BoE decision will be eyed during Thursday’s London/NY crossover. The MNI markets team expects a 25bp hike. We think that the biggest thing that could impact market pricing re: the BoE would be the removal of “coming months” from the forward guidance.
• NY hours will bring the release of weekly jobless claims data, challenger job cuts and the monthly productivity and unit labour cost metrics.