Overview of the Central Bank Clock:
- Rate markets are fully priced in a 50 bps rate hike by the Federal Reserve on Wednesday.
- Market prices have avoided any ‘dovish’ effects of Russia’s invasion of Ukraine.
- We’ll discuss how the market will respond to the Federal Reserve’s May interest rate decision. Starting at 1:45 PM EDT/17:45 GMT on Wednesday May 4, 2022, you can join live by watching the stream at the top of this note.
The more funky FOMC has arrived?
In this issue of Central Bank Watch we will It reviews the opinions and speeches of several US Federal Reserve policymakers throughout April. Although there have been no Fed speakers since the communications blackout began on April 23, nothing has improved significantly in recent weeks along the inflation front to suggest that the FOMC is not doing well. will arrive this wednesday
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50-bps or 75-bps in May?
There has been a marked shift among Fed policymakers since early April. While most officials believe a 25-bps rate hike would be appropriate in May. The latest inflation data has prompted a more active change in rhetoric, with many FOMC members openly advocating a 50-bps rate hike, and some talk about the possibility. of a 75-bps rate hike
April 1 – Evans (President of Chicago) says his views match the median among his policymakers. It calls for six more 25 bps rate hikes in 2022.
April 2 – Williams (New York President) said interest rate hikes will be gradual throughout the year but markets should prepare for continued tightness in 2022, noting thatObviously we need to get something more normal or neutral, whatever that means.”
April 3 — Daly (President of San Francisco), usually on the dovish side of the spectrum, said, “tHe was 50 except the negative surprises between now and the next meeting had grown.“and that”These initializations would be appropriate.”
April 5 Brainard (Fed Governor) called the Fed’s work on reducing inflation “critical” while commenting that the balance sheet cuts will begin soon. “Because the recovery was much stronger and faster than the previous round. I expect the balance sheet to shrink much faster than in the previous recovery. with a noticeably larger number of uppercase letters and a significantly shorter period per phase compared to the previous recovery in 2017–19.”
April 6 – Harker (Philadelphia President) said inflation was “too high” and expected “A series of deliberate and methodical hikes, for example.The years continue and the data evolves.”
April 7 – Bullard (President of St. Louis) retains his position as the most cowardly FOMC member. Noting that he wanted to raise interest rates 50-bps in May and he “I want the board to get a policy of 3-3.25%.rate in the second half of this year.”
April 10 – Maester (Cleveland President) warned that “It will take some time for inflation to drop.but still confident that the United States will avoid a recession in 2022
April 11 – Waller (Fed Governor) says the Fed is trying to raise interest rates.”In a way that there is not much [collateral damage to the US economy]But we cannot adjust the policy.”
Evans changed his mind earlier this month, saying: “IIf you want to be neutral by December This might require something like 9 hikes this year and you won’t get that. If you only do 25 times in each meeting” while observing the “so I can definitely see this case.”
April 12 – Brainard said the Fed would move “Quickly” to raise rates and to fight inflation through.”set of interest ratesincrease as well as the beginning of the balance sheet runoff.”
Barkin (President of Richmond) suggested that “tThe best short-term path for us is a quick move to the neutral range. It is then tested to see if the inflation pressures during the pandemic are easing. And how is the inflation rate going to last?”
April 13 Bullard warns that if the Fed doesn’t tighten policy fast enough It will destroy your own credibility in the long run.
Waller said he would like to see more aggressive tightening sooner. noting that he wouldlove the preload method Therefore, a 50 basis point increaseMay corresponds to that and possibly more in June.and July.”
April 14 – Williams commented that a 50 bps rate hike was a “reasonable option” considering its accommodative policy.
Mester advised the Fed to be cautious in raising interest rates, saying: “Our intention is to reduce the accommodation at the necessary timing to bring demand into a better balance with limited supply. in order to control inflation while maintaining expansion in economic activity and a healthy labor market.”
April 18 Bullard said a rate hike of more than 50 bps was not his “fundamental case” but he “would not deny it”.
April 19 – Evans noted that the Fed is “Ppossible…transcend neutrality,” Neutral is the level of interest rates that do not support or hinder the economy. In doing so, he saw that “inflation rate 3 to 3.5%” by the end2022.
Kashkari warned that the Fed is “must do more with our moneypolicy tools to reduce inflation” if the supply chain remains.restricted
April 20 – Daily commented “mA move towards a more neutral stance that does not stimulate the economy is of utmost importance.” and saw a neutral rate of about 2.5%.
Fed’s Beige Book Out Now, With Inflation Still In Focus “Inflation pressuresStill going strong from the last timeReported by the company continues to go through the rapid increase in production costs. tto customers.”
April 21 – Delhi suggests aggressive tightening is close to the Fed.”50 basis points increasein two meetings Let’s start with our balance sheet.Tax Reduction Program”
Powell said he liked raising interest rates like “Take the burden in advance” by agreeing that “50 base points will be ontable forMay meeting”
Priced many times Priced-In
with US inflation higher in decades Markets have drawn forward expectations of a sharp rate hike in the coming months. We can measure whether the Fed’s rate hikes are priced using Eurodollar contracts by examining differences in borrowing costs for commercial banks over time in the future. Borrowing costs – Spread – for May 2022 and December 2023 contracts to measure interest rates by December 2023.
Eurodollar Futures Spread (May 2022-December 2023) [BLUE]US 2s5s10s Butterfly [ORANGE]DXY Index [RED]: Daily time frame (May 2021 to May 2022) (Picture 1)
Compare the odds of the Fed raising interest rates to the US Treasury’s 2s5s10s butterfly. We can measure whether bond markets are performing in a manner consistent with what happened in 2013/2014 when the Fed signaled its intention to cut its QE programme. Butterfly 2s5s10s measures change. that are not parallel to the US yield curve and if the history is correct That means the middle rate should rise faster than the short- or long-term rate.
After the Fed raised interest rates 50-bps in May. There are six 25-bps rate hikes through the end of 2023, after which butterfly 2s5s10s have been trading sideways in recent weeks. This indicates that the market is still interpreting the outlook for the Fed’s short-term interest rate hikes. The focus remains more on the Fed and less on Russia’s invasion of Ukraine.
Federal Reserve Interest Rate Forecasts: Fed Funds Futures (May 3, 2022) (Table 1)
Fed fund futures have remained very aggressive in recent weeks. Tightening is expected at the next three meetings. Traders see a 100% chance of a 50-bps rate hike each May, June and July, with the Fed expected to rise to 2.75% (currently 0.50%) by the end of 2022.
IG Client Sentiment Index: USD/JPY Rate Forecast (3 May 2022) (Chart 2)
USD/JPY: Retailer data shows 30.69% of traders are net buyers, with a short to long traders ratio of 2.26 to 1. The number of long traders was 5.16% lower than yesterday and up 25.90. % from last week Meanwhile, the number of net-short traders was 3.47% higher than yesterday and down 6.10% from last week.
in general We will take the opposite view of the confidence of the crowd. And the fact that traders have net-shorts indicates that the USD/JPY price may continue to rise. net short positioning than yesterday but net shorter than from last week.
The combination of current sentiment and recent changes gives us a more diversified bias in USD/JPY trading.
We’ll discuss how the market will respond to the Federal Reserve’s May interest rate decision. Starting at 1:45 PM EDT/17:45 GMT on Wednesday May 4, 2022, you can join live by watching the stream at the top of this note.
— Written by Christopher Vecchio, CFA, Senior Strategist.