A Central Bank Bonanza

The Federal Reserve set a hawkish tone yesterday, causing U.S. Treasury yields to break out to new cycle highs. The benchmark 10-year yield touched its highest level in sixteen years as rates approached their pre-financial crisis peaks. 📈

As a result, interest-rate-sensitive sectors like real estate followed bonds in their breakdown. Below is a great chart from ATMcharts, who shared his perspective on the breakdown in the real estate sector ETF. 📉

And bond ETF investors continue to feel the pain, as most of their gains from the last decade have been wiped out in just two short years. Talk about a round trip! 😱

But the U.S. central bank wasn’t the only one making its decision this week. So, let’s quickly review the other countries that announced changes. 📝

  • Brazil cut rates by 50 bps to 12.75%
  • Indonesia kept rates unchanged at 5.75%
  • The Philippines kept rates unchanged at 6.25% 
  • South Africa kept rates unchanged at 8.25%
  • Switzerland kept rates unchanged at 1.75%
  • The U.K. kept rates unchanged at 5.25%
  • China kept rates unchanged at 3.45% and 4.20%
  • Norway raised rates by 25 bps to 4.25%
  • Turkey raised rates by 500 bps to 30%
  • Sweden raised rates by 25 bps to 4.00%

The Bank of Japan is expected to keep its negative interest rate policy intact at its meeting tonight, with most not anticipating the easy-money approach to change until at least late 2024 or 2025.

Overall, most developed market central banks have paused their rate hiking cycles after reaching a rate that they deem appropriately restrictive. However, they’re remaining hawkish in their stance, leaving further hikes on the table if inflation’s downward path does not continue. ⏯️

Over the last few months, core inflation has ticked up in several of these countries due to their economies and labor markets holding up better than anticipated. Central bankers will watch this closely as they make their future monetary policy decisions.

Meanwhile, many emerging markets have suffered major currency devaluation relative to the U.S. Dollar as their economic growth suffers. As a result, they’re having to cut rates in an attempt to stimulate growth at the risk of further reducing their currency’s attractiveness. 🔻

After years of bonds being the boring thing to talk about, they’re now the talk of the town as rates wreak havoc on the stock market’s recent gains. We’ll continue to keep you updated as these market moves develop. 👀

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A “Pause” That Refreshes

Today’s big story was the Federal Reserve’s interest rate decision and projections, so let’s jump right into it. 👇

First, we’ll start with the market’s expectations. Coming into the decision, the bond market was pricing in a roughly 93% chance of a Fed “pause” today, with only 7% expecting another 25 bp hike. And…that’s exactly what we got. However, the devil is in the details. 🔍

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International Central Banks Follow Suit

Yesterday the U.S. Federal Reserve raised interest rates by 25 bps and set the stage for ongoing rate increases as it continues to battle inflation. 📰

Today, we heard from the European Central Bank (ECB) and Bank of England (BOE), which also continued tightening. Let’s see what they had to say.

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Just A Minute(s)

The Federal Open Market Committee (FOMC) released the meeting minutes from its January 31 to February 1 meeting, where it raised rates by 25 bps. And while previous minutes had shown most members were on the same page about the policy path, there was some contention in this meeting. ⚔️

Most members stressed that inflation remains well above the long-term 2% target and that ongoing rate increases would be necessary. The ultimate question(s) remains how high do rates need to go to be restrictive, how long will they have to stay there, and what path will the Fed take to get there?

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