The Fed maintained its monetary policy (see Fed postview) and the Fed Chair’s measured tone concerning the risk of recession and inflation calmed investors. The Fed will start shrinking its balance sheet at a slower pace from next month, with the market expecting the Fed to end its balance sheet reduction by the summer, paving the way for a possible rate cut this year. Today, the markets will be focused on the BoE, where we expect a pause in rate cuts (see BoE preview).
Rates: rather calm market, with the € curve flattening ahead of the FOMC statement. The yield for the 2Y Schatz rose by 2bp to 2.20%, whereas the yield for the 10Y Bund eased by 1bp to 2.80%. Sovereign spreads remained relatively stable, with the 10Y BTP-Bund spread tightening by 1bp to 110bp, while the 10Y OAT-Bund spread was stable at 67bp. The € 5Y5Y inflation swap was stable at 2.16%. Finally, swap spreads tightened by around 1bp for the 10-year Bund ASW to -13bp (vs. Euribor). In the United States, the less hawkish-than-expected remarks by Jerome Powell contributed to a 7bp rally by 2Y TNote to 3.97%. The market is now pricing in 65bp of rate cuts this year.
FX: the DXY dollar index put on 0.48% to 103.7 ahead of the Fed's likely maintenance of the status quo. The rise was fuelled in particular by renewed interest in US technology stocks. Against this backdrop, all G10 currencies weakened against the dollar. The EUR/USD corrected by 0.56% to 1.088, penalised by risk aversion linked to the arrest of one of Erdogan's political rivals in Turkey. With the BoE meeting today and investors remaining cautious, sterling was the G10 currency that weakened the least against the US dollar, the cable shedding 0.24% to 1.297. The EUR/GBP rose by 0.31% to 0.839. The BoJ having maintained the status quo, the yen weakened against the US dollar, losing 0.46% (USD/JPY at 149.9). With the political situation rattling the market, the Turkish lira hit an all-time low before recovering (the USD/TRY jumping to 40.9610, before returning to around 37.7, a movement of 4% on the day).
Equities: there was a rebound ahead of the FOMC statement, particularly in the United States, with the Nasdaq and the Magnificent 7 (Tesla in particular) outperforming. In Europe, the Stoxx 600 gained 0.2%, driven by the energy sector (+1.4%), followed by techs and industrials.
Credit: there was a tightening of iTraxx indices (-0.9bp for the Main, -3.7bp for the X-Over) and spreads in the cash market. Note the return of Forvia to the market, with a new 5nc2 priced at 5.625%, so well below the 6% IPT (and close to levels for the existing 2031c27 in the secondary market): the fact that this new issue did not trigger a repricing of the issuer’s secondary curve is good news for the automotive equipment manufacturer, indicating it is eliciting investor appetite. Turning to bank deals in the primary market, there was also keen appetite for the new Lloyds 5Y OpCo, Barclays T2 12nc7 and AIB 11nc10, which all closed below their respective reoffer spreads.
Fed: following its March meeting, the FOMC decided to maintain the target range for the federal funds rate (at 4.5% for the upper bound), marking a pause for the second consecutive meeting after having cut its rates by 100bp since September. The FOMC noted that “uncertainty around the economic outlook has increased”, which Jerome Powell went on to clarify as reflecting the wide range of potential policies that could be pursued by the executive, including tariffs. The Summary of Economic Projections pointed to weaker growth, higher inflation and higher unemployment in 2025, but the dot plot indicated, as in December, that the officials expected two rate cuts this year. The dot plot therefore indicates that the Fed still intends to cut rates twice despite higher inflation being forecast, confirming there is an easing bias. However, until the data is reason enough to alter its course, the Fed appears in no hurry to depart from its current stance.
EU: the European Commission has introduced a new instrument (Security Action for Europe – SAFE) to raise up to €150bn on the capital markets to help EU Member States rapidly and substantially increase investments in defence capabilities. These funds will be disbursed to interested Member States upon demand, on the basis of national plans. In addition, the ReArm Europe/Readiness 2030 plan is to rely on the European Investment Bank (EIB) to widen the scope of its lending to defence and security projects, all the while mobilising private capital and sending a positive signal to the markets.
Ukraine: US President Donald Trump reported having a "very good" hour-long phone conversation with Ukrainian President Volodymyr Zelensky, just one day after his discussion with Russian President Vladimir Putin. In a post on his social media platform Truth Social, Trump stated that the call focused on aligning the requests and needs of both Ukraine and Russia, and he mentioned that efforts toward a ceasefire were progressing.
Eurozone: the final estimate of February inflation was revised downwards to +2.3% YoY from +2.4% YoY previously. Core inflation unchanged compared with the flash estimate, still put at +2.6% YoY.
France: the finance minister indicated yesterday during an audition in the Senate that the 2024 public deficit will probably be a bit better than initially expected (6.0%). We argued 2 months ago that the deficit could be more around [5.5-5.7%]. This matters for the 2025 deficit target as it would mean the 5.4% target will remain achievable despite several headwinds, including growth revised down (Natixis: 0.7% vs. 0.9% in the budget law) and a government that remains fragile.
