Bank of England (BoE) sent a more hawkish message than we and markets had expected, as it is concerned about overheating the economy. This is also the reason why we now expect the BoE to hike by 25bp already in May (although admit tedly it is a somewhat close call between May and August ) and launch a hiking cycle.
EUR fixed income markets fluctuated quite a lot during yesterday’s trading session. On the back of BoE hawkish message yields climbed higher. However, later in the afternoon spillover from risk off sent iments in equity markets weighed in yields, e.g. with the equity volatility index VIX increasing from around 25 to above 30 yesterday after the index has been t rending lower since the major risk-off day in the financial markets on Monday. Overnight , the risk-off sent iments in equity markets cont inued with Asian stock markets in red.
In the US, Fed nominee Goodfriend was approved by the senate banking committee yesterday. The vote was 13-12, making it a close call whether he will be approved by the full Senate, where the Republicans only has a very slim majority 51-49.
Yesterday, Fed’s William Dudley said in a Bloomberg interview, that ‘the little decline that we’ve had in the equity market today has virtually no implications for the economic outlook’, indicating (as expected) that the Fed is seeing through the current market turmoil – it has to be more persistent for the Fed to become concerned.
The US Government entered a partial shutdown as Congress missed the midnight deadline to pass the two-year spending bi ll announced on Wednesday. The House and Senate plan votes early Friday morning. The USD300bn two-year spending bill also includes a suspension of the debt limit until March 2019, meaning Treasury can start rebuilding its cash buffer again, which will drain USD liquidity if passed.