Fed Hikes Rates & Signals More To Come

Okay, I hope you're doing well. We've just gone through the close on the New York Stock Exchange, so I just thought I'd jump on and give you a quick update and review of what exactly the FOMC have just announced, where as you can tell by the headlines, they've just hiked interest rates by 25 basis points, the first rate hike since 2018, very much as expected in terms of their forecasts which they released in this particular meeting. I'll delve into those in more details, but for the infamous dot plot metrics, indicative then of 6 further rate hikes to come for this year, pretty much in line with market expectations. But despite that, we did see some pretty large two-way price action. Initially equities selling off, the dollar and US yields spiking, only then to completely reverse that going through the press conference and actually finishing substantially higher in US equities by the closing bell. So what exactly happened? First off then, let's just take a look at this, the The Fed hiked interest rates by 25 basis points. As I said, it's the first time, as you can see here, that they've lifted rates since 2018. So here we are here. Perhaps a little bit of context helps, and so let's go back and rewind the clock over the last 22 years or so to see the last few cycles that we've had of rate increases. And here was the financial crisis and the reaction to that as rates plunged to zero interest rate, ZIRP policy. Then we had the kind of graduated and very cautious incline of rates under the, the Janet Yellen period. Then of course the economy started to roll over and COVID hit at the beginning of 2020, and we went right back to that point. So as you can see here, and as per the typical way of which markets tend to function, the actual execution of today's move— sure, we've had a little bit of volatility on the initial release, but overall fairly contained when you think about all of the talk prior to the Ukraine-Russia situation about are the Fed going to hike 50 basis points and the kind of laser focus on that as an issue, they've executed the first of, as I said, what is going off historical precedents, like to be a sequence of rate rises, and the markets actually rallied in the end. So what exactly has happened? Well, a couple of other things to be aware of. The actual vote here, there is 9 voting members on the FOMC, and their vote was 8-1. So there was one dissenter. That center was a chap called James Bullard, which I'm sure many of you are familiar with. He's kind of the outlying uber hawk, and he wanted a 50 basis point move. He's been calling for that for some time. It doesn't come as a surprise at all. So we kind of flip over and let's have a look at the— a couple of different things. Let's start with this, which is the actual economic projections that come out of the Fed. So if you're not familiar with looking at these, this is when they outline every alternate meeting, so 4 times a year. In March, June, September, their economic projections for GDP, unemployment, PC inflation, and of course the, the dot plots, which we'll go back and look at. So again, unsurprisingly, they've downgraded the change in real GDP from the last time we had these numbers back in the end of 2021 in December, saying they now see that at 2.8% from 4%, but they then see that kind of leveling out back to exactly where it was part prior to this whole situation that's happened with the extension of the commodity squeeze on Ukraine and growth going back on to trend as they previously thought in 2023 and 2024. Unemployment remains very much largely unaltered. It's PCE inflation where the predominant change has come, but that was very much as people were expecting. So a sharp uptick given all of the inflationary pressure that we're seeing at the moment globally. Supply chain disruptions already very much present. And then on top of that, this latest squeeze that we've had on the Russian situation. So they now see that at 4.3% from 2.6%, a substantial upward revision. The Fed actually said they're attentive to the risks of further upward pressure on inflation and inflation expectations. I think that's quite an important comment for them to make because it kind of shows that they're, they're proactive and their willingness to be assertive over the main issue that markets are quite fearful and anxious about at the moment. So I think that's actually a positive step, even though in a sense it's talking in a much more hawkish manner. I think what the Fed are trying to do there is show and exert a degree of control that they have on the situation despite the enormous challenge they have at hand. Um, a few other things then that they said. They did say they anticipated that the ongoing increases in the target range will be appropriate, but repeated their pledge to be nimble. And again, kind of fits into the same explanations I just said about inflation. So here you can see, and perhaps it makes more visual sense to look at it in the form of the dot plots, what we have seen is a market increase in where they see interest rates in the nearer term and then kind of actually decreasing further out in the longer term. So again, looking to get on top and tackle this, this issue they're confronting at the moment on the big surge that we're seeing in inflation. Um, the other thing that a lot of people look at is the balance sheet. So in terms of the sequencing, it's kind of the end of active bond buying, so Treasuries, mortgage-backed securities, as they're doing, then executing in, in combination with this, the rate hike, and then the series of rate liftoff from there thereafter. But then about quantitative tightening, so not reinvesting the principles for the expiring bonds that they have on their swollen kind of balance sheet at the moment. And what they said about that, which is at the size of $8.9 trillion US dollars, I must remind you, at this point in time, is they're going to shrink that at a, quote, coming meeting without elaborating. And I guess that's keeping the ultimate flexibility card on the table. And I think that's probably the right sensible and strategic move to make given the uncertainties that we're seeing at the moment on the geopolitical side, uh, the evolving situation that's happening with COVID in China. So subsequent impacts that could have on global supply chains. Probably that, that's sensible that they don't commit to any definitive timeline at this point. Then on the issue of Ukraine, he did comment on that in the press conference. He acknowledged that geopolitical uncertainty is clouding the outlook and emphasized that the conflict is likely to put additional upward pressure on near-term inflation. Remember, they aggressively hiked that near-term inflation forecast, uh, and did say that that's going to have an impact at home but also weigh on economic activity as well. So what happened then on the charts? And I guess let's flip it over. And I've got here two charts I just want to focus on. One is euro-dollar, the euro-dollar future currency pair. So you can see here, this is where we dipped initially on the dollar strength and then rallied into the US close. This is the Nasdaq. And actually, the Nasdaq finished the session up 3.3%. This is the beginning of the session today. So if I'm just going to mark this up here, this is where the European trading day started. This is when the— well, just, just go back, rewind a little bit. This is yesterday morning. So this is the two-day move that I want to look at because the S&P has actually had its biggest two-day rally since April of 2020. So this was yesterday. And then the US came in— this European came in this morning, was here, and then we had the lift going through the latter part of the US sessions. This is when went through the US trading morning, and then we had the volatility, the initial downtick on the FOMC, and then the subsequent powerful rally that we've had to close things out up at this level at around the 14,000 in the futures. And if we look at that on the daily continuation, um, you know, just to put this in a bit of perspective, you know, people were very worried, and, and banks obviously reevaluating the situation as it's evolving quite rapidly and downgrading their outlooks for US equities. And we were seeing a sell-off to magnitude of around 23% from low to high of where we were trading in November of last year. But in the last 2 days alone, looking at the NASDAQ here, we have rallied the best part of about 8.5% from those lower bound levels. Having found some support 2 days ago, which really was the commencement of this rally at around those May double bottom that we saw going back to, to last year. And what's been the rationale there? Well, really it's kind of twofold in my mind. One is the situation what's happening in Ukraine. The latest is that Ukraine has said that the FT article, which is one that came out earlier today, that reported Ukraine and Russia had made significant progress on a tentative 15-point peace plan including a ceasefire and Russian withdrawal. Now, at the time when that came out during the early part of US trading hours, the market loved it. Stocks started rallying, uh, so on and so forth. However, Ukraine has come out and basically stated that they've denied that and it only represents the Russian position, um, and therefore it's still unresolved. To me, on that matter, because I think these are the two important points which really ultimately underpin this really resurgent equity market of the last 2 days is that there's no smoke without fire. And ultimately, I think it's in both parties' interests they look to strike a deal in the coming days or weeks. I think a lot of that stop clock probably tied to the grace period of the likelihood of Russia not paying down on some of that dollar debt that's come due. The latest on that was the payment on Russian government dollar bonds with coupons due today was not posted by the close of business in London. I thought that would be the case. I would say that that's a good marker in my mind that that next 30-day period of when this, this ceasefire and troop withdrawal agreement needs to kind of come through— they've made quite considerable progress when you kind of look through beyond the headlines over the course of the last week, and I think that that will continue. That's not to say it's not going to be without some two-way price action and a lot of headline noise to get to that point, And then the second point, which I think really explains this lift and really is why the rally was so powerful, I think of all the challenges that central banks have, particularly that of the FOMC and Jerome Powell at the moment, I think what they've done today is be very assertive. They've talked about this idea that they're attentive to the risks of further upward inflation, they continue to be nimble, and so a lot of this talk I think is them just trying to say that, look, we're going to do what's necessary to tackle inflation. And that's the, the, at the forefront of, I think, the biggest risk to markets here. And the fact that they've kept open the ability to be flexible with that, I think, is about as optimum as you can get with the challenges that they're facing at the moment. Don't forget, you've got the Bank of England tomorrow, so I'll drop a link in the the notes of this video. Don't forget to sign up to the Market Maker newsletter, which I put out at the end of every European trading day. I'll update you on the Bank of England as well then, but they're very much as well expected to hike rates. That should come as no surprise to anyone, and it will be the third rate hike in a row that we would have seen from the bank. So yeah, look forward to it. Have a good evening, and I'll catch you for the next video. Take care.