Federal Reserve Chair Powell gave global monetary policy tightening expectations another hawkish push after signalling that recent data has been stronger and inflation remains uncomfortably high. The SOFR curve implies a 5.65% Fed funds peak in September, i.e. higher for longer, while December 2023-24 spreads at -147.5bp are within 5bp of the lows of the cycle, indicating steep cuts through 2024.
The crystallisation of the Fed's higher-for-longer view and 40bp priced for the March FOMC implies that investors are increasingly open to the Fed reverting to a 50bp hiking pace that Chair Powell did not push back against. That setup leaves Fed pricing more dependent than ever on major data releases over the next week with NFP out on March 10 and CPI March 14.
Unless US jobs and inflation trends turn negative soon, the investing environment for duration-sensitive equities and EM bonds and equities will remain challenging, commensurate with USD upside. Still high US real yields suggest an economy that is not buckling under the weight of tighter monetary policy.
For the Bank of Japan, yen underperformance over the past month puts pressure on Governor Kuroda to further adjust Yield Curve Control at Friday's monetary policy meeting.
Meanwhile, the Reserve Bank of Australia's openness to a pause in its hiking cycle at the April meeting is making AUD upside much more difficult, particularly after an underwhelming China National People's Congress did not hint at more stimulus beyond expectations.
- UBS Strategy
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