Fed holds rates steady as markets await development surrounding U.S. trade policy
Summary
Although it was a relatively light week for economic reporting, it proved to be very busy. Investors focused keenly on the Fed, which left rates unchanged, in line with market expectations. Chair Powell noted an increase in uncertainty since the last policy meeting and reiterated his belief the Fed is well positioned to respond to market developments. The first trade deal was announced last week between the U.S. and the U.K., which provided some much-needed optimism for the markets. However, the details of the deal will not come out for a few weeks. Equity markets were relatively flat on the week, with the S&P slightly declining -0.45%. The 10-year Treasury yield moved higher, closing the week at 4.39%, an increase of 7bps. Over the weekend, news emerged of a 90-day pause in most tariffs between the U.S. and China resulting from the trade meetings held in Geneva. Effectively, the U.S. reduced tariffs on Chinese imports from 145% to 30%, while China reduced tariffs on U.S. imports from 125% to 10%. On the news, equity futures rallied 3%, oil increased almost 4%, and the 10-yr Treasury yield jumped 8bps. We will continue to monitor these developments to see if this optimism will hold, or if this will be a short-lived rally.
Federal Reserve rate decision
On Wednesday, the Federal Open Market Committee (FOMC) voted unanimously to hold the fed funds rate at a target range of 4.25% - 4.50%. Chair Powell highlighted the increase in uncertainty and his comments were mostly consistent with previous remarks. He reinforced the Fed position that it is in a good place to respond to market developments, given the current level of interest rates. Market response to the Fed decision was muted, as interest rates saw little change. However, expectations for the next rate cut are now squarely in July, rather than June. It is worth noting that diverging monetary policy across the globe continued as the Bank of England cut rates by 25bps on Thursday, just a few weeks after the ECB also cut their key interest rate. This divergence is primarily a result of U.S. tariffs and should be monitored closely as trade deals are announced in the coming months.
U.S. Treasuries
U.S. Treasuries indicate yields for on-the-run U.S. Treasury bills, notes, and bonds, which are typically the most recently auctioned and most liquid issue with a maturity closest to the stated tenor. These are commonly used for pricing fixed-rate debt at origination and for calculating yield maintenance.
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1-month Term SOFR swap rates
1-month Term SOFR swap rates reflect the rate to swap a Term SOFR indexed loan with monthly interest periods and payments and an Act/360 day count to a fixed rate. These rates do not include transaction specific mark ups and may not match swap rates for loans that use other SOFR base rate variations.
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Other key releases and news
ISM services came out last week and, at a reading of 51.6, was higher than expectations. This is a positive development, as many economists were worried that the soft sentiment data would lead to a more severe pullback. Jobless claims declined to 228,000 on the week from 241,000 the previous week. This was another welcomed development as it is yet another sign that labor markets remain resilient. Productivity decreased by -0.8% and unit labor costs increased by 5.7% in Q1, which was generally in line with forecasts. Finally, the announcement of a trade deal between the U.S. and the U.K. stole the headlines for the week. Many had hoped this would be a comprehensive deal, but it appears to be rather limited in scope. Importantly, as it currently stands, it seems as though the 10% baseline tariffs will remain in place for most goods. However, U.K. steel and aluminum will be exempt from the 25% levy, and the tariff on the first 100,000 vehicles will be lowered to 10% from 25%. Details of the trade deal will be announced in the coming weeks.
The week ahead
Investors will get a fresh look at inflation data (CPI and PPI) and the health of the consumer (retail sales and consumer sentiment) this week.
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