A Rare Treasury Yield-Curve Trade Emerges After Fed Decision
The Federal Reserve’s interest-rate decision sparked a move in the U.S. yield curve that’s been virtually absent of late. The spread between 5- and 30-year yields widened after the announcement to 33.6 basis points, the highest since April 27. Curve steepening is a rare enough occurrence — it’s near the flattest levels in more than a decade amid bets on continued gradual Fed rate hikes. But it’s the manner of the steepening that’s striking.The world’s biggest bond market experiences so-called bull steepening when shorter-term Treasuries rally to a greater extent than their longer-dated counterparts. Indeed, five-year yields fell as much as 1.7 basis points and two-year yields dropped 1.2 basis points. In contrast, 10-year yields were flat and those on the long bond rose. Traders attributed the move in short-term yields to the Fed being less hawkish than anticipated after its preferred measure of inflation reached its 2 percent target this week for the first time since February 2017.“If there was an expectation that the statement was going to be more hawkish and that the Fed was going to guide the market to expect three more rate hikes this year, I didn’t see it in the statement,” said Subadra Rajappa, head of U.S. rates strategy at Societe Generale.
Fed Leaves Rates Unchanged, Says Inflation Close to Target
Federal Reserve officials left interest rates unchanged, acknowledging inflation is close to target without indicating any intention to veer from their gradual tightening of monetary policy. “Inflation on a 12-month basis is expected to run near the committee’s symmetric 2 percent objective over the medium term,” the policy-setting Federal Open Market Committee said in a statement Wednesday in Washington. “The committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate.” Officials may have signaled their willingness to allow inflation to exceed their 2 percent goal somewhat by adding a reference to the “symmetric” nature of their target. The FOMC also noted the weakness in growth in the first quarter, removing a reference in the in March statement that the economic outlook had “strengthened in recent months.” They balanced that out by noting strong growth in business investment. The yield on 10-year U.S. Treasury notes slipped slightly to 2.96 percent following the release of the statement, while the S&P 500 Index of U.S. stocks climbed to its highest level of the day and the Bloomberg Dollar Spot Index fell. U.S. economic growth cooled in the first quarter to an annualized pace of 2.3 percent after averaging higher than 3 percent in the previous three quarters. The decision to maintain the federal funds target range at 1.5 percent to 1.75 percent was a unanimous 8-0. This FOMC meeting won’t be followed by a press conference.
Euro Area’s Easter Inflation Blip Gives ECB Cause to Stay Wary
A slowdown in euro-area inflation — an Easter-related statistical blip that in normal years would be ignored — could give the European Central Bank another reason to put off any decision on ending its bond-buying program. Consumer-price growth unexpectedly weakened to 1.2 percent last month and the core rate, excluding volatile items such as food, was the lowest in more than a year at just 0.7 percent. Both measures were below most economists’ estimates. The ECB and the European Commission each predict an upturn later this year, yet the concern is that the continued drip of feeble data combined with risks such as trade protectionism damage confidence so much that companies and households put off spending. “The ECB will want to look at the next couple of months to assess to what extent this sharp drop in core inflation is temporary,” said Aline Schuiling, an economist at ABN Amro. “If we stay at these low levels, they might consider extending the purchases or having a longer taper.” ECB chief economist Peter Praet, in the text of a speech delivered in Paris two hours after the inflation report, reiterated the central bank’s intention to wait while it judges whether the slowdown is short-term or not. “The latest economic data and survey results have generally surprised to the downside, suggesting some loss of momentum in economic activity,” he said. “Temporary factors may also be at work. We will also need to monitor whether, and if so, to what extent, these developments reflect a more durable softening in demand.”
Investors in Asia Stocks Have a List of Reasons to Be Jittery
There are a plethora of reasons out there to sell equities today. Risks of a Federal Reserve’s interest rate hike in June moved front and center Thursday, jostling for position with a simmering China-U.S. trade war, and weaker currencies on the growing list of headaches for stock investors in Asia. And the “sell in May” theory might come into fruition this year: the MSCI Asia Pacific ex-Japan Index fell 0.5 percent to extend a three-day slide as most markets in the region followed U.S. stocks lower. Hong Kong’s Hang Seng Index slumped as much as 2 percent, while benchmarks in Indonesia and the Philippines tumbled at least 2.5 percent. Japan remained closed for a holiday. The Fed, which held rates steady for May, said inflation will run near its target over the medium term and it expects economic conditions to evolve in a manner that will warrant further gradual increases in the federal funds rate. “The Fed’s outlook on rising inflation is bad for stocks as it confirms the prospects of three to four rate hikes this year, with the earliest in June,” said Lex Azurin, an analyst at AB Capital Securities in Manila. Returns for stocks will get smaller in a period of rising interest rates and inflation, he said. The Fed’s decision to stay the course will continue to boost the dollar and weigh on the Hong Kong dollar and stocks, according to Ken Chen, Shanghai-based analyst with KGI Securities.
China’s Stock Payouts Are Slowly Improving
A growing trend among China’s A-share stocks to increase dividend payouts may strengthen with their inclusion in MSCI Inc.’s international stock indexes, a move that incentivizes companies to make themselves more attractive by offering steady income streams. The dividend-payout ratio for members of the CSI 300 Index has been at least 30 percent since 2014 as authorities have been pushing for higher dividends to help develop the equity market. The nation’s securities regulator has made cracking down on “iron roosters” — a Chinese saying for a stingy character — a top priority in 2018.