OVERNIGHT NEWS
# Bond yields retreat, periphery spreads tighten after ECB announces unscheduled policy meeting at 11am CET to discuss rent sell off in government bond markets. 10y BTP/Bund tightens 25bp to 217bp. EUR/USD +0.5%, Euro Stoxx futures +1.1%. Schnabel says ECB “can and should respond to a disorderly repricing of risk premia” (WSJ).
# Day ahead: Fed forecast to raise FF rate by 50bp but larger increase in the balance, macro and dot plot/terminal rate forecasts key. SG forecast BCB to raise Selic rate by 75bp to 13.50%.
# China May activity data above forecast: industrial production +0.7% yoy, retail sales -6.7% yoy, FAI ytd slows to 6.2% yoy.
# RBA governor Lowe warns inflation likely to reach 7% by end 2022 from current 5.1%, decisive policy action needed.
# Nikkei -1.1%, EUR 10y IRS -3bp at 2.58%, Brent crude +0.4% at $121.6/b, Gold +0.4% at $1,819/oz.
Fed day – markets brace for 75bp rate increase
COP –USDCOP is surprisingly performing better than its Latam peers. Our trader notes that he has seen better inflows in NDF and some in cash. Trading continues watching 4,000 as the level to watch followed by 4,040. Although volumes are picking up it is still in line with average which shows the reduction in client interest. It seems that as we near the local elections it has caused offshore clients to remain on the side-lines.
Markets are in a unique situation today – not only do we have the FOMC decision at 14:00 EDT, but the ECB is holding an emergency meeting as we go to print. Today’s markets are going to be very choppy as we wait on various announcements. Around 01:45 EDT, multiple media reports said that the ECB was hosting an emergency meeting, helping BTP-Bund 10y spreads to tighten and lifting EURUSD as we wait for fragmentation concerns to be addressed. The set up is therefore tricky going into the FOMC, where our economists acknowledge a 75bp rate hike is a real possibility but we think a 50bp hike is more likely (market pricing leans towards the former). The updated median dot, new inflation forecasts and Powell’s guidance will also be key for the market interpretation.
We stress that market conditions continue to be fragile, with diminished liquidity conditions, stretched positioning in parts and elevated volatility levels – therefore market moves today may not always be intuitive. Other central banks deserve a mention, with the JGB futures market in freefall after the BoJ reinforced YCC. The PBoC left the MLF rate unchanged while we saw some hawkish hints about LPR. BRL markets widely expect a 50bps rate hike after the NY close today, but we are focused on what guidance and forecasts accompanies the move. Otherwise, CHF and GBP face likely 25bps rate hikes in the next 24 hours, with the latter more focused on that than the latest Brexit headlines.
UST belly underperforms, real yields rise; Wider US-Japan yield differentials lift USD/JPY to high since 1998; ECB’s Knot asserts “options are not necessarily limited” to 50bp hike in September; 10y Bunds reach 1.75%; GBP/USD below 1.20, first time since March 2020; US 10y at 3.473% (+11.4bp).
Latin America:
Latam currencies remained under pressure during the session amid further USD strength and weak risk appetite. MXN remained the worst performing currency in the region, depreciating ~0.9% and consolidating ~20.65 as market participants continued to reduce long MXN positions. In contrast, COP ended the session relatively flat, despite the challenging global backdrop and ongoing uncertainty in Sunday’s presidential election. Local rates also remained under pressure, but the overall moves were significantly smaller compared to the previous session. Most of the underperformance was concentrated across Brazil’s DI curve, as the market further reduced 2023/24 easing expectations ahead of Wednesday’s BCB meeting; January 2024 DIs closed 36bp higher, at 13.65%.