Hawks but no Hikes

By Johanna Fernandes, Staff Writer

Wednesday was a huge day for markets, when both the Bank of Canada (BoC) and the US Federal Reserve reported pivotal interest rate decisions. Ahead of the meetings, equities rebounded slightly while both CAN and US rates were higher in the front-end.

The BoC kicked off the day with a Rate Decision release at 10am. The BoC’s Forward Guidance includes their commitment to hold the policy rate until economic slack, or 2% sustained inflation, has been absorbed. With record high inflation prints (4.7% vs. 2.0% target), hot oil prices, and an unemployment rate back to pre-pandemic levels, markets were ~70% priced for the first 25bps hike. Despite the clear need for liftoff, the BoC pulled a BoE and opted to not hike – but removed Forward Guidance to signal a March hike.

“Everyone should expect interest rates to be on a rising path,” Governor Macklem said after the announcement. Despite his attempt to still sound hawkish, Canada rates quickly steepened off after the news, with the 2y dropping 8bps, well-bid across the curve.

Acknowledging the hot economy, the BoC raised inflation forecasts to 5% for the first half of 2022 and expects it to decline to ~3% by year end. They also revised down GDP growth, with 2021 at 4.5% to 2022 expecting 4%. Macklem also mentioned that they will keep BoC holdings of bonds constant “at least until liftoff” and then consider reducing the size of the balance sheet by letting mature bonds roll off.

Heading into the FOMC meeting at 2pm, markets expected a hawkish Fed with signals pointing to a 25bps hike in March. The Fed delivered, and announced the final round of asset purchases in February and signaled a rate hike for the March FOMC. Fed Chair Jerome Powell acknowledged that the Fed has met its dual mandate, and emphasized the uncertainty of the economic outlook regarding price pressures. Employment levels do not seem to be a concern for policy anymore, as the country has recovered 85% of the jobs lost at the beginning of the pandemic. In fact, he mentioned that “the economy is quite different this time” compared to post financial crisis, and that policy will need to be “nimble”, or more reactive to rising rates and high inflation.

The Fed also released a new addendum called Principles for Reducing the Size of the Federal Reserve’s balance sheet, which highlighted that quantitative tightening would start right after rate hikes. This further signaled openness to an earlier quantitative tightening cycle and end to the ultra-easy monetary support of the past two years.

The hawkish surprise gave the market color on the future of rate hikes, which drove a huge bear flattening, pushing the 2y and 10y up by 11 & 7 bps on the day.

At market close on Wednesday:

  • The S&P 500 fell 0.1% after rallying almost 2% earlier in the day
  • The USD rose 0.5% and hit a one-month high
  • The UST rose 10bps to 1.87%
  • The 10y CDA closed the day at 1.83%, despite moving 5bps lower after 10am

Photo by Etienne Martin on Unsplash


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