Market sell-off ahead of the FOMC increases chances for a dovish policy outcome


Despite mixed data on the US economy released on Thursday (strong retail sales and jobless claims, weaker than expected industrial production), Treasury selling gained momentum with two-year yield rising above 3.90%. A 4.5% Fed interest rate in March 2023. Since the beginning of September, markets have added almost 50 basis points to the Fed’s expected tightening, therefore triggering broad market risk, w and facing yet another discount shock. the Treasury market we see a continued inversion of the yield curve, with the spread between 10 and 2 year Treasury yields falling to a new low of -0.43%. At the same time, 10-year bond yields stabilized around 3.45%, while 2-year yields continued their march to higher levels, expectations of the Fed’s aggressive withdrawal of liquidity support prevailed over expectations of high inflation (both negatively affect the price ). of bonds). A closer look at the 10y/2y spread reveals that a decline in the spread to zero or its fall into negative territory is often associated with a recession in the US: Market reaction to an intensifying term structure of US rates is close to that described in macroeconomics. textbooks: a strong dollar, hard-hit cyclical and commodity currencies, and a slump in the commodity market. In fact, key asset classes rate the risk that central bank tightening will lead to such a destruction of consumer demand that it will cause a recession in the global economy. In the foreign exchange market, the dollar remains the top choice. The average gain against European currencies since the beginning of the week was 1.6%, against NOK – about 2.5%. GBPUSD fell the most on Friday as the market grows confident that the Bank of England will be the underdog in the tight race and raise interest rates by 50 basis points, while the ECB and the Fed have already raised rates by 75 basis points. in recent meetings. It is difficult to expect a sustainable recovery of risk demand in such a situation; market rallies are likely to be shallow and short-lived reflecting prevailing bearish sentiment, so betting on a major rebound could be risky. The British Pound was badly hit by dismal consumer data released today: retail sales plunged 5.4% y/y against the. forecast of 4.2%, MoM decline accelerated to 1.6% against a much less pessimistic forecast of -0.5%. On an annual basis, retail sales were on a slippery slope for the third month in a row: As a result, GBPUSD broke through the bottom of March 2020 (level 1.14). Market focus today is on the index of consumer sentiment from the U. of Michigan. An important component of this report is inflation expectations. Signs of persistence will bolster market expectations that the Fed will increase the pace of its monetary tightening. The situation with inflation for the Fed is extraordinary: one-year inflation expectations rose to the highest level since December 1981, which led to concerns about a loss of CB credibility and inflation expectations, which force the Fed to raise the rate at an unprecedented pace: It is worth noting. that bond markets have set the bar high enough for the Fed to surprise with a sharp decision. Investors shy away from risk and buy the greenback on rumors, however, as is often the case, the market reaction to rumors will likely prove to be too emotional, and facts may trigger a correction. Based on this, the risks are tilted towards a dovish FOMC meeting.



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