Bonds took a beating yesterday in the aftermath of the Fed (see more below), while also equities felt pressure. The US 10-year yield ended the day higher by around 10bp, while the 5-year yield jumped by a whopping 16bp. If Ms Yellen wanted to emphasize continuity after Mr Bernanke, the market reaction certainly suggests she did not do a good job.
Yields saw some upward pressure already earlier in the day, and the German 10-year yield closed higher by some 3bp. Intra-Euro-zone spreads mostly experienced some widening in the semi-core names.
After the big moves yesterday in the US, German yields will open clearly up today, but yields are likely to reverse some of yesterday’s rise in the US and also German bonds may do better after a negative opening.
The Fed’s message also sent equities lower, but bigger losses were avoided in the US. S&P 500 closed lower by 0.61%. Also Asian equities are trading lower this morning, and Europe is set to open lower. It thus looks likely to become a challenging day for equities.
Fed scraps quantitative forward guidance – sees earlier rate hikes
The Fed’s message contained a few surprising elements yesterday, though another USD 10bn tapering in bond purchases and moving from a 6.5% unemployment threshold to an assessment based on a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments were not among them. The FOMC sees the risks to the outlook for the economy and the labor market as nearly balanced, while it currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions.
The first surprising element was in the Fed’s interest rate forecasts. The median forecast for end-2015 was lifted by 25bp to 1.0% and the one for end-2016 by 50bp to 2.25%. Although Ms Yellen sought to play down this change in her press conference, saying almost nothing had changed, markets paid more attention to her attempts to quantify the term considerable amount of time (in connection with the Fed’s view that it would be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends). She said it was hard to define, but would be something in order of six months, which means rate increases could start already during the first half of next year. Fed funds futures markets currently fully price in a 25bp rate increase during the second half of next year.
Yesterday’s message suggests the Fed is gradually paying more attention to also the upside risks looming in the future, and even though the current Fed rate forecasts cannot be described as anything but still pointing to a moderate pace of rate increases, the path still became more hawkish. After this change, the markets will have an easier time pricing in a quicker pace of rate increases in response to positive data surprises.
Dutch government parties hammered in local elections
The two Dutch governing parties, PvdA and VVD lost a lot of support in Dutch local elections held yesterday. The big winner was D66, while the Socialist Party also gained considerable support. Geert Wilders’ anti-immigration PVV lost support as well, but had candidates only in two regions. Opinion polls have shown for quite some time that the governing parties have seen their support plunge, while the polls have put Mr Wilders’ party in first place. The elections for the European Parliament in May will be very interesting.
EU summit and Philadelphia Fed manufacturing index ahead
Another 2-day EU summit will start today. The discussions will likely be dominated by Russia and Ukraine, but other topics include climate and energy policy, industrial competitiveness and economic policy. The meeting does not look likely to become a market-mover. In addition, the ECB’s Lautenschläger will speak at 16:00 CET.
In the US, weekly jobless claims will be out at 13:30 CET, while February existing home sales and the Philadelphia manufacturing index will see daylight at 15:00 CET.
Plenty of action on the auction front
A lot of bonds will be auctioned today, on both sides of the Atlantic. Spain will re-open bonds maturing in 2017, 2019 and 2028 for a combined total of EUR 4 to 5bn. France, in turn, will sell 2-, 3- and 5-year bonds for a total of EUR 7 to 8bn and inflation-linkers for EUR 1 to 1.5bn. In the US, USD 13bn of 10-year TIPS will be offered.
Nordea