Global reflation theme losing momentum lately but Fed still set to hike next week - Danske Bank

Analysts at Danske Bank expect the Federal Reserve to raise the target range by 25bp to 1.50-1.75% and the FOMC to maintain the hiking signal at three hikes, at the meeting next week. 

Key Quotes: 

“Fear of global reflation was one of the key triggers of the equity sell-off in early February.  The stronger-than-expected wage growth in the nonfarm payrolls set off the sell-off. However, the numbers have provided less support to the reflation theme. The nonfarm payroll number last Friday saw only a small tick up in wage inflation, while February’s strong increase was revised down. Furthermore, as announced on Tuesday, US CPI inflation for February grew at a monthly rate of 0.2%, as expected, while core inflation also fell back slightly. Market-based inflation expectations have also declined somewhat on the back of the numbers.”

“Less concern about reflation, and hence a more aggressive central bank stance, has prompted a rebound in risky assets. While we expect the Fed to raise the target range by 25bp to 1.50-1.75% at its meeting next week, we expect the FOMC to maintain the hiking signal at three hikes this year, albeit lifting the median dot for next year from 2.25 to 3.00 hikes in line with our view.”

“We disagree with the markets, which price in only slightly more than one hike next year (so a total of slightly more than four hikes from now until yearend2019 against our expectation of six hikes). However, typically, markets are more focused on the near-term outlook, so we do not expect major market volatility on the back of the Fed meeting next week.”