FirstFT: Traders price in growing chance of Fed interest rate rise

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Good morning. Traders have built up bets that the Federal Reserve could raise interest rates again, a once-unthinkable prospect that highlights a shift in market expectations after stronger than expected US economic data and hawkish comments from policymakers.

Options markets now suggest a roughly one in five chance of a US rate increase within the next 12 months, up sharply from the start of the year, according to analysts.

The shift in expectations has hit bond markets, with interest rate-sensitive two-year Treasury yields — which move inversely to prices — reaching a five-month high of 5.01 per cent. Wall Street stocks incurred their longest losing streak in 18 months before jumping yesterday.

Traders’ central expectation is for one or two rate cuts of a quarter of a percentage point each this year, according to pricing in the futures market.

But following three months of higher than expected US inflation data, investors in a corner of the options market are beginning to take seriously the possibility that the Fed’s next rate move could instead be higher. Read more on the factors driving the shift.

And here’s what else I’m keeping tabs on today:

• UK: Bank of England chief economist Huw Pill speaks at the London campus of the University of Chicago’s Booth School of Business.

• Economic data: S&P Global releases flash purchasing managers’ indices for the EU, France, Germany, UK and the US, while the UK has March public sector finance data.

• Results: Akzo Nobel, Kering, Novartis, Philip Morris International, Spotify and Visa are among the companies reporting. The spotlight is on Tesla, whose shareholders are bracing for the carmaker’s worst performance in seven years. See the Week Ahead newsletter for the full list.

Five more top stories

1. Joe Biden has told Ukraine’s President Volodymyr Zelenskyy that Washington will rapidly escalate military aid to Ukraine as soon as Congress gives final approval to a $95bn security funding package this week. The US president made the pledge to Zelenskyy during a call yesterday, according to the White House, two days after the Republican-controlled House of Representatives led by Speaker Mike Johnson voted to approve the assistance after months of delay.

• UK aid: Rishi Sunak will unveil an extra £500mn of military funding to Ukraine today and announce the largest supply of munitions to Kyiv as the UK prime minister travels to Poland and Germany to reinforce ties with key European allies.

• EU sanctions: European companies still operating in Russia are scrambling to comply with a new EU policy that from June bars them from offering professional services to their subsidiaries in the country.

2. Rishi Sunak has admitted that flights to move asylum seekers from the UK to Rwanda will not begin until the summer as he finally secured parliamentary approval for legislation to underpin the government’s contentious plan. The prime minister originally hoped the first flights to Rwanda would get off the ground in the spring, but he said at a Downing Street press conference yesterday that they would not happen until July.

3. An independent review commissioned by the UN has said that Israel has not substantiated allegations it made that staffers working for the body’s agency for Palestinian refugees were members of terror groups. The Jewish state has claimed publicly that “a significant number of UNRWA employees are members of terrorist organisations”, the report said, but “Israel has yet to provide supporting evidence of this”. Read more about the findings.

• Campus tensions: Police arrested dozens of pro-Palestinian demonstrators at New York University yesterday as authorities stepped up efforts to quell student protests amid scrutiny over antisemitism on US campuses.

• Port congestion: Mediterranean container ports are nearing full capacity, operators have warned, as they deal with overflowing storage yards following Houthi attacks on ships in the Red Sea.

4. Exclusive: India is seeking to shore up its access to critical minerals such as lithium, a government official said, as the world’s most populous country rushes to catch up with rivals including China in the race to build next-generation energy supply chains. New Delhi is pushing state-owned mining groups to pursue mineral reserves in South America and Africa. Read more on the country’s plans for this sector.

5. Goldman Sachs has moved its top investment banker for European financial companies from London to Paris as the Wall Street bank finalises its post-Brexit relocation plans. Dirk Lievens, head of Goldman’s financial institutions group for Europe, the Middle East and Africa, moved to Paris last month to be closer to the company’s continental European clients, according to people briefed on the matter. His relocation comes at a sensitive time for the US lender’s operations on the continent.

The Big Read

Rising mortgage rates have been the dominant feature of the property market in the past two years, and a major contributor to the UK’s cost of living crisis. The sudden jump in borrowing costs has highlighted an oddity of the British mortgage market: the unusually high portion of short-term fixed loans. More than 90 per cent of borrowers take out a fixed-rate mortgage for five years or less. Can long-term mortgages, a norm in the US, help solve the country’s housing crunch?

We’re also reading . . . 

• Trump’s trial: With his freedom at risk, the former US president has appeared more docile this week as he faces criminal, rather than civil, charges.

• Hungarian opposition: Péter Magyar, a former ally of Viktor Orbán, is now seen as such a threat to the prime minister that the government has deployed its full firepower against him.

• Beyond Bretton Woods: Global financial institutions will have to change if there is to be a real shift to a better system, writes Rana Foroohar.

• ​Wide-awake: Bamboo pyjamas and sensors in beds — while scientists seek to explain the mechanics of sleep, businesses can keep exploiting our tiredness, writes Leo Lewis.

Chart of the day

Military spending around the world rose almost 7 per cent to a record $2.4tn last year, the steepest annual increase in 15 years, according to research from the Stockholm International Peace Research Institute, a leading think-tank. Russia’s war in Ukraine was the main driver of European defence spending, but for the first time since 2009, military expenditure also increased in the other four main geographical regions.

Take a break from the news

To celebrate the 20th edition of the Financial Times and Schroders Business Book of the Year, past winners pick their favourite business books of all time.

Additional contributions from Benjamin Wilhelm and Gordon Smith