Stocks pare gains before Fed
Equity futures are dropping off morning highs but remain in the green at the time of writing ahead of earnings reports and the FOMC decision. The S&P is +1.3% and the Nasdaq +1.7% with the gains in the US echoed by a +2.3% rise in the Euro Stoxx. Dollar rate markets are modestly lower in response to the bounce in risky assets with the 10y note at 1.79% (+2bps) and Eurodollars 2-3 ticks weaker in the reds and greens.
Ahead, Barclays previews some of the issues around the Fed’s central decisions on the path of rates and its balance sheet in 2022. The bank plays down talk of a larger, 50bps hike in March.
- “We think this is highly unlikely for several reasons.”
“First, we strongly believe the Fed is willing to surprise on cuts, but not on hikes.”
“Second, we see a surprise 50bp hike as inconsistent with risk management. The Fed will have many opportunities to raise rates during the year if it feels it is falling behind. It seems far more likely that the committee would add a fourth or fifth hike to its baseline outlook (via the release of forthcoming SEPs), rather than leading with a larger rate increase.”
“Third, with the committee still in general agreement that disinflationary forces will kick in this year as supply bottlenecks fade and with little to no sign that longer-term inflation expectations are becoming unanchored.”
Turning to the balance sheet, Barclays expects the main decisions to be deferred a while longer.
- “While we do not expect any final decisions on the balance sheet will be taken this week, we expect the committee to continue its deliberations on its runoff plans. Most participants appear to prefer a fairly short time span between liftoff and runoff and, given the balances in the RRP, argue for a faster pace of runoff than was the case in the prior expansion. We expect Chair Powell to emphasize these points again and say that runoff is likely to start “later this year.” We foresee balance sheet runoff beginning in Q3, after the Fed has put in two 25bp rate hikes in March and June. We think the July meeting is a likely candidate for the announcement.”
Callables and Formosas: DB Green, Barclays, JPM, BofA
- Deutsche Bank last week sold a $460m 34y NC5 zero coupon callable Green Formosa. The EMTN matures Feb 2056, is callable annually from Feb 2027, and has an estimated IRR of 3.82%. Announced Jan 21. Leads are DB Taipei, E.Sun, KGI, Sinopac, Taipei Fubon and Taishin.
- Barclays last week sold a $90m 10y NC1 fixed callable Formosa. The EMTN matures Feb 2032, is callable annually from Feb 2023 and pays a 2.75% coupon. Announced Jan 20 and lead is E.Sun HK.
- JP Morgan last week sold a $285m 35y NC5 zero coupon callable Formosa. The EMTN matures Feb 2057, is callable every 2y from Feb 2027, and has an estimated IRR of 3.52%. Announced Jan 19 . Leads are E.Sun, Sinopac and Yuanta.
- JP Morgan last week sold an AUD150m 10y NC2 fixed callable Formosa. The EMTN matures Feb 2032, is callable annually from Feb 2024 and pays a 2.90% coupon. Announced Jan 19 and lead is E.Sun Sydney.
- Merrill Lynch sold a $10m 15y NC1 fixed callable Formosa. The EMTN matures Feb 2037, is callable annually from Feb 2023 and pays a 3.10% coupon. Announced Jan 25 and lead is BofA.
- Kia Corp. (Baa1/BBB+) is preparing a USD 3y and/or 5y Green bonds after investor meetings staring Jan 27. Leads are BofA, Citi, JPM, SocGen and StanChart.