One more and then done from the Fed?

OVERNIGHT

Asian equity markets are mostly down this morning following declines in European and US markets yesterday. Nervousness about the US banking sector is reportedly to the fore ahead of today’s monetary policy update from the US Federal Reserve. Oil prices also moved sharply lower yesterday possibly reflecting concerns of faltering demand. In New Zealand, a stronger than expected labour market report challenged hopes that the central bank may be close to a pivot on monetary policy.

THE DAY AHEAD

The US Fed seems set to raise interest rates again today with its 10th consecutive hike. Both markets and economists expect a third 25bp basis point increase in a row. Comments from Fed policymakers in the run-up to the meeting pointed to likelihood of such a move. 

The case for a further hike is not absolutely emphatic as Q1 GDP data showed that growth is already slowing and concerns about regional banks which have come to the fore once again following JP Morgan’s takeover of First Republic. However, last week’s higher than expected wage data supports the move. Moreover, the Fed has shown itself reluctant to surprise markets in the past and to back off now may be seen as a sign of panic.

Nevertheless, the comments of Fed officials suggest that this may be the last hike for now. That may be signalled today by removing the reference in the press statement to the likelihood of additional rises and instead just saying that any further action will be data dependent. That gives them wiggle room for another move if necessary, but the implication is that there will probably now be a period of policy rate stability. However, it seems unlikely is that the Fed will lend any support to market forecasts of near-term rate cuts. 

Ahead of the Fed announcement, the April reading for the ISM services index will provide a timely update on a key part of the economy. The March reading fell sharply to only 51.2. That is close to falling below the 50 reading that would signal that economy is moving into recession. More positively for April, the US PMI services measure rose to its highest level in a year and, while two indices are not always closely correlated in the near term, that is a signal that the ISM measure will be up. Also to be released today is the ADP gauge of private sector employment for April which is forecast to show a 150k, but note that in recent months it has tended to undershoot the official payrolls data due Friday. Elsewhere the calendar is very light but the March Eurozone unemployment will provide an indication of the state of the region’s labour market.

MARKETS

US Treasury yields fell sharply yesterday reflecting market uncertainty about economic conditions ahead of today’s Fed update. UK gilts yields and yields in other markets also came under downward pressure. In currency markets, the US dollar slipped against the euro but rose against sterling as the pound continued to struggle to hold on to last week’s gains.