Fed hikes 50bps
Fed decisions were in line with expectations with a 50bp rate hike and the commencement of runoff starting in June at a maximum pace of $95bn per month after a brief phase-in period, consistent with what the Fed signaled in the recent set of minutes. Powell’s tone about combating inflation has become even more forceful and mentioned: “we have the tools and will to bring inflation down…we are strongly committed to restoring price stability…the labor market is extremely tight while inflation is much too high…we are on a path to move our policy rate expeditiously to more normalized levels”. Powell said the neutral rate is 2-3% and promised that the Fed wouldn’t hesitate to go higher than that range if needed. On a dovish note, Powell pushed back against talk of 75bp increases by explicitly guiding for 50bp hikes at the next few meetings. He also expressed some optimism about the direction of inflation, “core PCE is at a peak or flattening out, but we want more than just some evidence”. Powell argued that the fed can tighten policy without triggering a recession: “we have a good chance for a soft or softish landing…the economy is very strong and well positioned to absorb tighter monetary policy”.
Other central banks
The Bank of England (BoE) raised rates by 25bps to 1%, as expected. However, BoE’s gloomy forecasts on economic activity in UK weighed on the sterling, as the central bank could stop hiking rates before market expectations. The Reserve Bank of Australia (RBA) raised its policy rate by 25bp to 0.35%, surprising the market on the hawkish side. This decision was taken to counteract significantly higher-than-expected inflation and strong wage growth. Also, ahead of the 50bps rate hike by the Fed, the Reserve Bank of India unexpectedly hiked policy rates by 40bps amid surging inflation.
April headline nonfarm payrolls were better than expected, coming in at 428k compared to consensus expectations for 396k. The unemployment rate remained unchanged m-on-m at 3.6%, while average hourly earnings grew 0.3% m-on-m, below consensus expectations for a 0.4% rise. On a y-o-y basis, average hourly earnings came in at 5.5% as expected. The release noted that the largest gains were in leisure/hospitality, manufacturing, transportation, and warehousing.
Global economic data
In the US, the ISM manufacturing PMI reached a 20-month low of 55.4 in April, but still indicated healthy expansion, while the ISM services PMI recorded the 23rd consecutive month of expansion, even though it slowed too (to 57.1 from 58.3). The next big economic data point will be April CPI, to be reported next Wednesday, with headline CPI expected to rise 0.2% m-o-m, following a 1.2% increase in March, and core CPI expected to rise 0.4% following a 0.3% increase in March. In Europe, retail sales in the euro area dropped 0.4% m-o-m in March, with the biggest fall among large economies in Spain (-4% m-o-m). In a further demonstration of economic pressure in the currency area, industrial production in Germany declined by 3.9% m-o-m in March, much more than expected. Euro area unemployment continued to fall in March, to 6.8% from 6.9% the previous month. The Caixin China PMI for services fell sharply to 36.2 in April from 42 in March, its lowest level in two years, as Covid restrictions bit. The Caixan manufacturing PMI fell to 46 in April from 48.1 in March.